One of Crypto’s lesser-known innovations is the DAO (Decentralized Autonomous Organization), a form of social organization built on blockchains and smart contracts .
Prominent investor Mark Cuban hailed the DAO as ” a combination of capitalism and progressivism. ” In the crypto space, DAOs have been called ” the most important innovation ” and ” the future of work “.
Due to the immutable and open-source nature of blockchains, DAOs essentially enable people to coordinate, invest, and work at scale with economic certainty .
As of March 2022, the decentralized information analysis platform DeepDAO lists about 215 DAO organizations , which manage $9.5 billion in funds and have 500,000 active members. DAOs have different categories , including DeFi DAOs , fundraising/investment DAOs , social community DAOs , media DAOs , service DAOs , and more. As shown below:
This article will understand DAOs from the perspective of the historical development of modern capitalist enterprise in order to better understand the potential for coordination and economic scale of these new social organizations.
The essence of business
We start with the most basic question: why do businesses exist? Why is the market an archipelago of big companies and SMEs instead of billions of freelancers, independent workers and employers?
The economist Ronald Coase pointedly pointed out that corporations exist to increase efficiency . A business is an organizational model that helps capitalists reduce the transaction costs of doing business . If CEOs were haggling over terms and conditions with an employee on every job, they would spend all their time haggling and micromanaging rather than starting a business. An effective solution is to create a hierarchical corporate structure where employees have long-term contracts with the company so they can spend their time on management responsibilities.
Ronald Coase developed his theory of the firm from inductive observations of large centralized corporate structures such as General Motors, Standard Oil, and DuPont from the late 19th century to the 1950s. These large corporations were established in a U-shaped structure (characterized by centralized control and unified command of the enterprise ) that became synonymous with modern industrial capitalism and the most common organizational structure for decades, and remains so today .
Above: The U-shaped structure of an enterprise
This seems like a very common-sense insight today. However, it’s hard to describe how groundbreaking Ronald Coase’s explanation was at the time. Before Ronald Coase, economists viewed the business as a static black box that existed only in a market economy. In the post-Ronald Coase era, the analytical thinking of companies has evolved into a complex management structure that balances transaction costs.
Innovation from U-Shaped to M-Shaped Enterprises
Ronald Coase’s theory of the firm is not without criticism. In theory, the idea that a high-level central planner in a large company can oversee all aspects of the company and, for each task, be able to decide immediately whether to hire another employee in-house or outsource it to the market. is unrealistic.
Ronald Coase’s explanation is full of neoclassical economic thought, in which business owners are assumed to be rational calculators ( rational economic people ) who respond strictly to market incentives and make quick cost-effective analyze. (Editor’s note: Homo economicus is an economic term that assumes that people are always rational and self-interested, and pursue their subjective goals optimally.)
By the 20th century, Ronald Coase’s theory of the firm had also been disproved by real-world experience . As globalization makes the world economy increasingly interconnected, companies seek to become increasingly complex by diversifying into markets far from home.
This centralized U-shaped structure is no longer sufficient to manage the growing range of complex management decisions. The weakness of the traditional U-shaped company stems from its concentration of decision-making power in the hands of a few top executives, which makes the company too slow and unwieldy to grow . It may be easy to manage a company in the domestic market, but in different regions, due to different market conditions, supply chains, cultural phenomena, etc., a U-shaped structure can be too difficult to manage a company.
Over time, this has resulted in U-shaped firms innovating spontaneously and decentralizing into multi-sector M-shaped structures (as shown in the figure below). This allows companies to delegate decision-making to lower-level departments that oversee different products or geographic areas of the business .
Above: Enterprise M-structure
The impact of M-firm innovation is everywhere. Businesses today hire dedicated product, marketing, and sales teams in every operating area, rather than centralizing them at headquarters.
1) Decentralized decision-making of M-type enterprises
Why decentralize a business? Building on the insights of Ronald Coase, later economists argued that there were two key drivers for the structural decentralization of M-firms . The first driving force is trying to address the limited knowledge that top management faces when planning .
In foreign markets with vast differences in competitive conditions, supply chains, laws, and consumer sociocultural preferences, large corporations face severe intellectual complexity in order to compete effectively. M-type businesses allow line managers to make day-to-day decisions efficiently because they are more aware of local conditions, while upper management focuses on strategy.
General Motors’ major success in the 20th century, for example, owes much to this division-independent organizational model , which allowed middle- and lower-level managers to run their business completely. During the 1920-1921 crisis, GM experienced a 75 percent drop in sales and record low production, and longtime president Alfred Sloan began to pursue radical organizational decentralization . Sloan emphasized that department managers must be strictly “independent and can accept or reject (senior management) advice”. He wrote in his blueprint:
“The general manager formulates all the policies of his department and is only under the executive control of the president. The responsibility of the head of each department is independent, and he should exert his full initiative and ability to maximize his specific business , and to Full responsibility for success or failure.”
The innovation of the M-shaped structure brought success to General Motors. The company surpassed its arch-rival, Ford, to set the standard blueprint for all capitalist companies in the future.
2) Incentive to work
The second driver of M-type firms revolves around incentives . When compensation is tied to salary, U-Corporate employees have little incentive to work harder or to be entrepreneurial within their scope of work . From a financial accounting perspective, such a company has idle human capital assets. Profits are not optimized.
The innovation of the M-type business lies in the improved combination of incentives and rewards with lower management, allowing the business to leverage this dispersed knowledge across the organization. It enables lower management to exercise their judgment and act as local “entrepreneurs” within the company to develop new sub-product variants, manage procedures, and adapt existing production methods to better suit specific economic conditions of the market .
Of course, executives are not taking a completely hands-off approach; some rules are still dictated by higher-ups. But the point is that the M-shaped structure allows for a range of decentralized adjustments and changes that are not possible in traditional U-shaped enterprises.
Readers familiar with DAOs may already know how this works. Powered by blockchain, the DAO is the next iteration of the ongoing decentralization of modern capitalist enterprise .
M-shaped corporations, like their U-shaped predecessors, are destined to be disrupted by DAOs . To some extent, the internet and smartphones have already started this process. In the so-called Gig Economy , companies like Uber , Airbnb, and TaskRabbit connect buyers and sellers in a decentralized way, unencumbered by rigid hierarchies and long-term contracts .
What sets the DAO apart from all previous organizational forms is the DAO’s flat, decentralized structure and absence of central planning . The DAO organization shares a vault and raises equity capital by issuing its own Token, attracting anonymous investors and employees who believe in its mission.
The transparent nature of the blockchain means that all DAO activities are managed on-chain and its smart contract code can be audited by anyone, giving investors and employees greater transparency into the inner workings of the organization .
In traditional businesses, ownership is centralized and key strategic decisions about hiring or expansion are made entirely privately by top management. The M-enterprise alleviates this problem to some extent, but it is still fundamentally a centralized structure .
The DAO’s decentralized ownership allows anyone holding their native token to vote actively by connecting their wallet to a DAO voting platform such as Snapshot .
DAO skeptics argue that not all members will actively vote due to voter fatigue. There is some truth to this, but it greatly ignores the relative improvement that DAOs bring .
Even if not all members will vote, the fact that the decisions of the DAO organization can be publicly accessible and scrutinized by more active members is a huge improvement, whereas traditional corporate decisions are kept secret.
A good analogy can be found in this regard, and that is the transition from political monarchy to liberal democracy in the 20th and 21st centuries. Peer-reviewed research in political science has found that most voters today are indifferent to politics, but political democracy allows at least a small number of active activists, journalists and concerned citizens to dissent and raise awareness of selected issues .
Is this less ideal than full voter participation? indeed so. But is it a significant improvement over absolute monarchies? Absolutely.
Solve incentive problems
The economic miracle of the DAO is how well it connects the incentives between work and compensation . Recall that the M-Corporate emerged to allow businesses to expand aggressively while reducing the need for top management oversight.
This management philosophy was pioneered by Arthur Rock, a well-known venture capitalist known for his early investments in technology companies such as Fairchild , Intel and Apple Computers. Drawing on his experience at Fairchild Semiconductor in the 1950s , Locke pioneered the private limited partnership model , which offered stock options to top executives and junior employees , that became synonymous with Silicon Valley stock culture.
This is a far cry from the days when only founders and venture capitalists owned equity.
Locke is well aware that motivation is important, and that key employees need to be motivated beyond salary for a company to be successful . Through Fairchild, Locke ensures that scientists and engineers critical to the company’s success receive stock options. This “liberating capital” model provides powerful incentives for workers and unleashes human talent.
DAOs extend this economic logic to every employee . Like gig economy workers, most DAOs offer flexible “pay for work” models . Unlike gig economy workers, however, DAO workers are paid in native tokens (equity). Thus, DAOs offer two benefits to their workers: flexibility and stakeholders . This gives them a further vested interest in driving the growth of the DAO organization.
Where will DAOs go?
Common criticisms of DAOs focus on the fact that not all forms of organizations need hyper-decentralized structures . This is true for DAOs that have a single mission and easily achieve economies of scale.
However, this is not so much a criticism of the DAO itself as it is a question of whether the product is marketable . Despite massive innovation by M-type firms, companies in industries such as metals, tobacco, sugar, etc. did not immediately adopt M-type firms because their expansion was not stalled by the same type of coordination problems.
Another common criticism points to DAOs’ low barriers to participation that can create scalability issues . In a large DAO where decisions need to be made across different areas of expertise, not everyone has the knowledge or motivation to make the right decisions.
In response, DAO tools like Orca Protocol or Aragon emerged to solve these problems. Orca facilitates the creation of “working groups” or small centralized departments (ie subDAOs ) within DAOs that can initiate their own decision-making processes . Token holders will vote for representatives of these sectors – similar to a political democracy. This allows DAOs to effectively scale decision making in a way that maintains some form of decentralization.
A prominent example of this can be seen in GitconDAO , which has 25,500 members . To scale up decentralized decision-making, Gitcoin employs a governance system of community representatives (known as Stewards), where community members vote on these representatives (known as Stewards), who make decisions on their behalf. Stewards’ responsibilities include clarifying organizational processes, community building, fundraising, anti-fraud governance and product strategy.
DAOs are still in their infancy, but the innovations in blockchain technology they are built on promise to solve coordination problems on an unprecedented scale .
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/where-will-dao-take-us/
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