Issues with Current Organizational Structures
<aside> 💡 In the previous section, you learned about how conventional organizational structures fall short. This is where a Decentralized Autonomous Organization comes in.
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Decentralized Autonomous Organizations (we’ll call them DAOs for short) aim to solve all these issues and more using the power of Web3. But before we talk about how DAOs work, let’s first break down the acronym and understand what is a DAO and why they matter***.***
Let’s break down what a DAO is by its individual definitions!
Now let’s put it all together! A Decentralized Autonomous Organization (DAO) is a structure to manage people or funds that can operate without the need for human oversight where decision-making power is shared by its members.
Birthed following the rise of self-executing smart contracts, DAOs aim to solve the problems faced by conventional organizational structures. Within a DAO, there exists no central decision-making authority that members must trust to interpret, execute, and listen to their proposals.
While stereotypical companies are governed by a closed board of directors, DAOs are governed by the people who make up the DAO. It is a more democratic system. Those democratic rules are upheld by predictable and transparent pieces of code created and agreed upon by the community. In short, this means that DAOs are more democratic than conventional organizations. Through the predictability of a DAO smart contract, organizations are able to execute decisions through a predefined set of rules that is immutable unless members themselves decide otherwise.
This approach solves the principal-agent problem introduced in the first section. Agents within a system no longer need to trust the principal to act in their best interest during conflicts of interest. Instead, members within a DAO only need to trust the smart contract code that anyone can view and see.
This transparency enables DAOs to make decisions that are best for its members and foster more robust communities.
Although you will hear more about examples of DAOs later, an interesting single-purpose DAO is the Constitution DAO that aimed to purchase a piece of the US Constitution. Although this group did not end up winning the auction, it demonstrated the power of DAOs to organize communities as it raised and returned over $47 million.
You can check out their website if you want to learn more: