In our ten years at Telstra Ventures, we’ve seen the emergence of many trends when it comes to the intersection of technology and finance – some now mainstay fixtures, and others that have fallen by the wayside. And, right now, it is difficult to think of a more literal confluence of technology and finance than cryptocurrencies (like us, Bitcoin is a little over ten years old) and the technology that underpins them: blockchains, or distributed ledgers.
Most recently, a new entity has been introduced: Decentralized Autonomous Organizations, or “DAOs,” which have incited significant excitement the world over. How are DAOs already actively changing business and investment opportunities? In terms of application, how can they be further adapted to realize even greater promise? While this piece examines DAO’s and their uses and some challenges, it seems obvious they have a long term role to play in certain kinds of investing. So now, we explore this new entity, where it currently stands, where it can go, and what it will take to get there.
What is a DAO? And How Are They Currently Used?
First, it’s important to have an understanding of what a DAO exactly is, and how such online organizations are presently operating. There’s an old saying that surfaces at our offices when we confront group decision-making, which is that “a camel is a horse designed by a committee.” A DAO is, in many ways, the ultimate digital expression of rules-based decision-making by committee, leveraging the blockchain to establish entities that solve for certain tasks, which are clearly defined by smart contracts. DAOs have no headquarters, central organization or single point of failure, but instead write rules in open source code, and encode decisions into smart contracts which are executed anonymously on the blockchain. To put it more simply, it’s when a group of people pool their collective funds or resources – anonymously – and then share the decision making responsibilities for their allocation.
Even though DAOs exist to satisfy a single purpose or goal, or type of transaction, they currently execute in a myriad of ways. It can be as straightforward as purchasing a specific asset, such as, famously, the PleasrDAO purchasing the sole copy of a Wu-Tang Clan album for $4 million. In other applications, DAOs are used to more complex effect, such as multiple assets, funding specific types of projects or even creating social groups.
One popular way in which DAOs are being used is for Decentralized Finance (DeFi), skirting traditional investment vehicles that could be considered elitist, inaccessible or not particularly transparent by everyday investors. And, while people may liken DAOs to angel investing, DAOs typically offer far lower barriers of entry – and more investor control – within their all-digital structures.
What makes DAOs so unique is that they are at once decentralized in terms of decision-making, while their mission is bound by the rules written to govern their purpose. A group of people unknown to one another invest in a DAO and this membership stake is measured in governance tokens (colloquially called “coins”). There is no structural hierarchy and no one person has decision-making authority in a DAO, rather, every member has a voice in decision-making, generally proportional to their coin ownership. No decision can be taken or executed without the knowledge and participation of the members of the DAO.
At the same time, because no one person has decision-making authority, the moment the DAO confronts a situation outside the boundaries of its original rules, it cannot act until its membership comes to some kind of consensus to rewrite the rules. This, of course, raises challenges – making their structure less effective when growing beyond the boundaries of a single use case scenario.
The Path Forward for DAOs
As mentioned above, DAOs have already proven themselves to be a useful and attractive tool. In fact, DAOs have already caught the attention of VCs: Andreessen Horowitz previously led multi-million dollar fundraising rounds for individual DAOs, and companies that support DAO creation. Other billionaire investors have offered positive public support for DAOs. But as effective as they’ve been in their initial applications, DAOs are not a perfect answer to every problem, and will likely need to continue changing to accommodate emerging needs and functionality beyond what they currently can.
How so? DAOs will need to find ways to stretch beyond their existing structural limitations. To become more ubiquitous, they’ll need to adopt a more scalable infrastructure and tooling. One such constraint this would help address, will be to better offer fair and balanced governance. Since DAOs are decentralized, it eliminates legacy hierarchical structures so someone can more easily join and influence the community. With traditional organizations – for example, public companies – there is a governing body of leaders, followed by board members, and ultimately shareholders (who find out what’s going on every three months when earnings are announced). With a DAO, everyone is equally in all and none of these positions (depending on their ownership share of coins and level of participation). Therefore, within a DAO, it’s easier for any one member to have a voice and vote within the group.
However, as the community grows, it becomes fundamentally harder to make fast decisions, or change course all together. In some instances, as a DAO grows, smaller subsets of teams will be created to tackle different parts of the organization – but in doing so, the DAO begins to fragment its founding benefit – a community-represented plan of action. As the organization grows and becomes more complex, it may break down trying to operate within the framework of something it has outgrown. To maintain its promise of equitable governance, DAOs will need to make structural adjustments for how decisions are made and how that decision-making power is determined to sustain a balanced approach. While we’ll have to wait and see what the future will bring, one such possibility will be more participation-level decision making which is divided up between those who make the decisions and those who are only there for the economic advantages.
Additionally, DAOs have another inherent hurdle in that they’re entirely digital – removing the human element of control. Operating in response to, ultimately, code versus people, means the structure is at the mercy of digital vulnerabilities. This was evidenced by the hacking, and subsequent theft, of $50 million from the first DAO in 2016. And while the investments or assets owned by the DAO are securely logged via the blockchain, making record and recovery theoretically more possible, the anonymity of the structure creates opportunity for attacks. While digitally native applications are attractive due to their ability to operate autonomously, DAOs will likely need to put some sort of IT governance in place to protect their integrity.
Finally, as DAOs – as with all emerging tech – come under more legal scrutiny, they too must be flexible to new regulatory requirements placed on them to continue operating true to their nature, but with good standing. It’s unforeseen yet how future legal rulings will impact them operationally, and the opportunities they can provide, but if history is any indication – new regulations often create new barriers to surmount.
Continuing the Digital Conquest
DAOs, as they exist now, have been used to great success in single use cases, and can continue to do so in similar capacities – such as companies adopting the structure for procedural purposes like general meetings, proxy voting, delegation to shareholders in a more controlled environment and so forth. However, to become even more integrated in the mainstream enterprise landscape, DAOs will need to solve for their current limitations to reach even greater potential, while currently lagging behind in maturity, usability and flexibility as compared to traditional software platforms.
DAOs represent just one path forward for the ongoing digitalization of how we work, live and do business as devices increasingly communicate with one another and people are more personally and professionally immersed into a digital stream than ever before. For the many ways businesses have brought processes “online,” the “Internet of Things” is still largely in its infancy, and DAOs are poised to grow alongside legacy software applications as they too continue to evolve. While the future of DAOs remains to be seen, one thing is for certain: the digitization of everything is just getting started.
At Telstra Ventures, we’ll be watching DAO’s closely to see how they evolve as we begin our journey on another decade of spurring the most innovative technology companies forward.