Why would the next Jack Dorsey, Elon Musk or Mark Cuban start a DAO rather than a corporation?
But the question is why would the next Jack Dorsey, Elon Musk, or Mark Cuban start a DAO rather than a corporation? Will decentralized business structures really ever replace the top-down hierarchies of today’s business titans?
Let’s look at how DAOs might permanently alter the entrepreneurial landscape, and maybe even the world economy.
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How Could DAOs Change the Business Landscape?
People like Larry Page and Sergey Brin from Google and Richard Branson from Virgin have shaped the world we live in today perhaps more than anybody else. Job creation, lower unemployment, and poverty alleviation are just some of the positive impacts that entrepreneurs like these have on the global economy.
As we already mentioned, some of them, most notably Mark Cuban, have been discussing how DAOs could revolutionize the startup and corporate landscape.
So what would happen if entrepreneurs the world over started launching new businesses as DAOs instead of corporations or partnerships? Would the employees be better off? How would the profits be split? Is it even legal to start a business as a DAO? We will soon try to answer these questions.
But just in case you are not yet familiar with the startup scene and entrepreneurial culture, let’s take a quick look at what entrepreneurs do all day, and how the companies they run work behind the scenes.
Entrepreneurs are the growth drivers of our economy. They create all sorts of amazing products, from Apple’s iPhones and Microsoft’s laptops to Google’s search engine and the Amazon marketplace. Entrepreneurial culture is an environment where innovating and risk-taking are the primary goals.
Jeff Bezos, who started Amazon to capitalize on what he rightly believed to be an untapped online retail opportunity in the book industry, is a perfect example of what an entrepreneur is.
Entrepreneurs can choose to structure their businesses in many different ways, but most are structured as corporations.
How Corporations Work
Corporations are businesses that, under the law, benefit from limited legal liability. A corporation is legally distinct from its owners, so if it goes bust, the shareholders are not personally responsible for the company’s debts.
Corporations are top-down businesses, which means that a group of people at the top – the shareholders, the CEO, and the CFO – sign off on all the big decisions that a corporation makes.
Corporations work much like they did back in the 1600s: they accept investor funds in exchange for the responsibility of maximizing value for their investors and shareholders. CEOs multiplying shareholder value has been one of the driving forces behind capitalism’s success.
However, this profit-driven mindset has also led to poor quality of life for many employees, as well as mind-boggling inequality across the world.
So what’s to be done here? Are people doomed to live in poverty forever? Well, DAOs, as a new type of business structure, could solve many of the problems created by corporations.
What Are DAOs?
DAOs are all about sharing ideas and wealth. They are somehow similar to centralized organizations, but with a few important distinctions.
Most notably, DAOs are community-led, digital organizations without central authorities like CEOs, CFOs, directors, boardroom members, or managers. Any member of a DAO can put forward a proposal, which the others can either approve or dismiss through a vote.
For example, let’s say an investment DAO’s members agree to split the proceeds of any money it makes equally between its 100 members. They write up a smart contract that sets out the terms of the agreement, and the members vote to make it an official part of the DAO’s operations.
The DAO’s members then decide to pool their funds to buy a business, which pays the DAO $10,000 on the first of every month. So when the first rolls around, the DAOs smart contracts send each DAO member $100 automatically.
Therefore, there is no accounts department, nor are there managers signing off on everything. The whole operation runs on publicly verifiable code and smart contracts.
Sounds pretty good, right? Well, plenty of venture capitalists would agree with you!
Multiple well-known VCs like Andreessen Horowitz have put up billions of dollars backing DAOs and other blockchain projects.
Of course, a16z isn’t the only VC firm to invest in DAOs. But all of the other VCs that have done so gave similar reasons for it: they are investing in and capturing value from the next generation of tech entrepreneurs and Web3 creatives without needing to actively manage the company or give over a certain amount of resources to the project.
Are DAOs That Different From the Businesses Operating Today?
DAOs are nothing like the corporations dominating the economy today, but they are not perfectly original either. Instead, you could think of DAO as a new expansion in the way businesses structure themselves throughout their life cycles.
For instance, most corporations start out in the world with just the foundering members, who then bring on employees and investors as the company grows. Should the company reach a multinational size, it will often have itself listed on a public stock exchange, which would allow almost anyone to buy shares of its stock.
But unless those stockholders own a significant number of shares, they have no say in how the company is run. Nor for that matter do most of the employees. In reality, every major decision is signed off by a close-knit group of people.
In contrast, DAOs give any person with a stake in the company, as well as people who work for the company, just as much say in how it is run and organized as the founders and majority shareholders. So while DAOs and corporations are both trying to make a profit, they take very different approaches.
However, while the digital and blockchain elements of DAOs are certainly new, the decentralized and democratic nature of DAOs is not at all.
In fact, giving employees a say in how the business they work is managed, as well as a financial stake, is a practice that has been carried out since the first cooperative was founded in Rochdale, England, in 1844.
What Is a Co-operative?
If you have never heard of co-operatives, think of them as brick-and-mortar DAOs. Those are people-centered enterprises owned and controlled by and for their members. Whether members of the co-op are customers, employees, or just people hanging out, they all get one vote on each proposal put forward by another member.
Co-operatives are not owned by shareholders, nor are they beholden to the profit-at-all-costs maxim of corporations. Thus they can focus on bringing every type of value to its members – and not just financial. Any profits a cooperative has left over after paying out any costs and wages are either reinvested in the business or returned to members as a bonus.
There are more than 3 million cooperatives up and running today, and about 12% of people work for or are a member of a cooperative. In fact, Mondragon, which is the seventh-largest company in Spain, has been run as a cooperative since 1956 and has an annual revenue of $12.1 billion. So who’s to say that corporations are necessarily the most profitable way to run businesses?
Operationally, cooperatives actually share a number of similarities to DAOs:
- Both are democratically run;
- Neither is run for the benefit of unknown shareholders;
- Both are managed in the interest of the people who actually work for them.
But the question you are probably asking here is why would a next-generation entrepreneur want to start a DAO when they could just start a corporation and earn way more money. Let’s try to unveil it.
What Advantages Do DAOs Offer?
DAOs offer entrepreneurs four distinct advantages over traditional business structures:
#1 – Low Overheads and Global Reach
First up, a DAO has tiny overheads and startup costs when compared to a brick-and-mortar business, which needs office space and furniture pretty much from day one, plus loads of other expensive equipment to operate at scale.
A DAO’s low overheads and expenses are obviously big wins for startup founders and entrepreneurs, as there is less pressure on them to make a certain amount of money every month to pay for all the brick and mortar.
Of course, it is not just office space and equipment that a DAO can do without. It also does not need any paid administrators, nor does it need to pay for middle managers, supervisors, or HR managers, which are taken care of by its smart contracts.
A DAO’s heaviest overhead is usually to develop its initial code, and, if necessary, rent some server space for hosting a blockchain. Both are preferable when compared with the aforementioned office space and equipment of traditional businesses.
But do not be fooled into thinking that because of its tiny overheads, a DAO must have limited capabilities or reach. In fact, a DAO has global reach right from the get-go, because anyone, anywhere, can apply for membership at any time.
#2 – Transparent and Fair Operations
A DAO’s operational rules are set out either in its code or its smart contracts, both of which are viewable by anyone at any time. The rules are immutable, transparent, and publicly verifiable, so anyone considering working for the DAO can check its rules and regulations before they become a member. They can see when and how they will get paid, and can even check that the DAO is paying its existing members, as all transactions are stored on a blockchain.
But remember that transparency and immutability benefit entrepreneurs as well. Smart contracts allow them to safely interact with strangers all over the world the moment the DAO is up and running without needing intermediaries to guarantee its members will not be ripped off. This is a benefit that quickly translates into rapid development unencumbered by third parties and profit-seeking intermediaries.
The other benefit of transparency is that a business owner can be sure that none of the DAO’s members can skim cash from the company coffers. Or if they are, catching them will be incredibly easy.
#3 – Easier Funding
And let’s not forget that token sales can require considerably less work to raise funds when compared to pitching ten venture capital firms consecutively. Moreover, they are a lot less risky than using personal cash to startup a new venture.
#4 – A Democratic Business Model
DAOs are democratic by design, meaning each employee – provided they hold some of the DAO’s governance tokens – has a say in how the DAO operates. It is the opposite of how most conventional business owners manage their operations today.
In fact, a recent study showed that a third of all employees do not believe that their boss listens to their ideas. Most of us have experienced the feeling that we are overlooked or ignored to some degree. But DAOs have better communication and collaboration built into their structure, and their employees know that their opinions and ideas are heard.
But how do a democratic business and better worker communication help business owners and entrepreneurs? Most obviously, they get to hear a wide range of opinions all the time and notice other employees critique those ideas before they need to look at them seriously. So there is less chance that a great idea will never see the light of day.
Another benefit comes from employees being financially involved in the company they work for, just as if they were in a cooperative. Naturally, employees with skin in the game work considerably harder than those doing it just for a salary.
So now we know what DAOs are and why the next Bill Gates might want to start one, let’s move to the next question: can they?
Could an Entrepreneur Start a DAO Today and Run It Like Any Other Business?
Thanks to the US state of Wyoming, entrepreneurs can run a DAO as a business and have it recognized by the US government.
How does it work exactly?
Obviously, being recognized as real businesses and gaining limited liability marked a huge leap for DAOs, and basically gave them a seat at the table alongside corporations, partnerships, and other business structures.
And if other US states, or other countries for that matter, give DAOs legal recognition and protection, we could see a surge in startup founders and entrepreneurs starting up DAOs rather than corporations.
But in the end, whether any individual business owner chooses to start a DAO instead of a more traditional business structure comes down to the individual and what they think is best.
Before DAOs could compete with corporations like Amazon and Unilever, we would need to see a radical culture shift within the business community. It might even take something truly drastic, like DAOs, and cooperatives only trading with other democratically-run companies to force corporations to decentralize or risk being left behind.
Some corporations, of course, will never shed their rigid hierarchies and centralized control. Still, it is possible that DAOs could spark something of a revolution, where people do not want to work for corporations and fight tooth and nail to work for DAOs and cooperatives instead.
Of course, we all know that the business world is not going to change overnight. But until the culture does change, we still have to overcome the mountain standing between where we are now and the next generation of entrepreneurs starting DAOs instead of corporations: regulation.
Regulation and Other Problems
Outside of Wyoming, there really is not much of a legal framework for running a DAO as a business. Most regulators are either in the process of working out how to regulate DAOs, or they are ignoring them entirely.
One of the reasons regulators and governments have been slow to regulate DAOs is simply because a DAO can not be restricted by anyone other than its members. And given that DAOs members are often spread out all over the world, how would a regulator get to all of them?
Besides, as DAOs do not usually have a physical base, the question of which jurisdiction’s regulations each and every DAO has to abide by remains. If a government did put DAO regulations into law, whether a DAO’s members abide by that regulation really is down to its members. So, there is not much a regulator can do to compel a DAO to follow any set of rules.
Also, if DAOs do gain legal recognition and are given the same rights as corporations, how would a regulator go about fining a DAO if its members refuse to pay the fine?
They would be unable to take funds directly from the company coffers, as they would with any other business because a DAO’s funds are stored in a crypto wallet requiring a full member vote and multiple signatures before the funds can move. So in the meantime, regulators will probably focus on regulating the DAO’s participants, rather than the DAO itself.
Also, you should be careful if a DAO you are a member of does not have limited liability status, as you can be held liable for whatever happens within the DAO, including for taxes on its profits.
Despite their popularity and influence over billions of dollars of assets, DAOs still do not have limited liability protection, nor are they recognized business models across most of the world. Without it, DAOs will always play second fiddle to the traditional corporation.
Still, call us optimists, but we believe that DAOs have a big role to play in the world economy, and we are hoping to see some more positive regulation this year. And one day, maybe we will all work for the global, digital cooperatives we call DAOs.