4 Things You Need to Know about Decentralized Autonomous Organizations (DAOs)

“Decentralized autonomous organization” (DAO) is not the tech world’s most glamorous neologism ever. Yet DAOs are poised to disrupt governance at the local, state, federal, and international levels. By leveraging blockchain technology, DAOs can ameliorate the challenges of coordination and trust and spread power equally among stakeholders.

The DAO regulatory terrain is evolving and complicated. You should seek professional financial and legal advice before jumping into this space. However, as a primer, here are four initial things everyone needs to know about this new approach to corporate governance.

1. U.S. States are Leading the Way

Vermont recognized the right of companies to register as blockchain-based LLCs in 2018. In April 2021, Governor Mark Gordon signed the Wyoming DAO Supplement, the first state law to specifically mention DAOs. The law allows DAOs to register as limited liability companies (LLCs) and clarifies member liability.

In March 2024, Gordon also signed bipartisan legislation that wraps decentralized unincorporated nonprofit associations (DUNAs) in the state’s regulatory framework. Other states at the DAO forefront include Tennessee, whose April 2022 law recognizes smart contract-managed DAOS, and Utah, which became the first state to codify DAOs as a distinct legal entity in March 2023.

New Hampshire is currently considering a bill that would grant DAOs legal personhood.

2. Blockchain Enables DAOs 

To understand DAOs, we have to backtrack a bit and look at the evolution of blockchain and cryptocurrency. 

The concept of blockchain is older than you might think. As early as 1982, cryptographer David Chaum first proposed a blockchain-like protocol as a way to establish and maintain trust among otherwise suspicious or antagonistic groups.

In 1991, Stuart Haber and W. Scott Stornetta described a digital technology that would prevent anyone from tampering with timestamps, thus ensuring the traceability of transactions.

Yet blockchain remained a specialist concept in search of a blockbuster application until the publication of Satoshi Nakamoto’s Bitcoin whitepaper in January 2009. Debate continues to swirl about who Nakamoto actually is (or was), but the essential point is that cryptocurrencies (and a peer-to-peer financial system) could not scale in the absence of blockchain.

Unlike fiat currencies, cryptocurrencies are decentralized (i.e., not backed by any Government authority). Token-holders of these currencies need a reliable way to determine value, buy and sell, certify transactions, and make collective decisions even when geographically spread across the globe. Nakamoto’s prescience was to realize that blockchain and cryptocurrency were synergistic technologies capable of disrupting the global financial system.

Because it lodges trust in software code–and a network of nodes and computers–rather than in individuals and intermediaries, proponents argue that blockchain democratizes finance and is more reliable, transparent, fair, accountable, and secure than the traditional monetary system. Proponents assume these same basic advantages will also underpin decentralized autonomous organizations.

3. Arguments for DAOs

Currently, U.S. states differ on whether or not DAOs should be wrapped into existing LLC frameworks or if they require new structures and regulations. However, proponents agree that decentralized autonomous organizations, now made feasible by blockchain technology, will improve the transparency and security of voting systems and  supply chains and accurately verify online identities. 

By removing intermediaries and rent seekers, DAOs can also streamline operations, enable seamless cross-border interactions, and improve financial performance.

Compared to traditional organizations, DAOs scale faster because both capital and the talent pool become truly global. No one has to move or even travel to participate effectively in a DAO, due to smart contracts, ergo skills, talent, ambition, and experience are freed from sunk costs , immigration bureaucracies, and geographical restrictions.

DAOs may also prove to be more innovative than most of their traditional counterparts. Even world-leading companies like Apple enter periods of stasis, and sometimes even become the new monolith that needs to be disrupted. DAOs speed up iteration and adaptation because the relevant community can act quickly through the consensus and voting mechanisms built into the smart contract.

Decentralization, done well, also promotes inclusiveness and diversity by reducing the concentration of power in the executive suite. It means that corporate leaders are less able to isolate themselves from the realities of public opinion, executive failure, and market forces. The rapid fall from grace of the once iconic Boeing is, in part, a cautionary tale of a C-suite that refused to hear criticism or contradictory information from the shop floor.

4. DAOs and the Future

Many DAO regulatory challenges lay ahead. As states continue to innovate, the federal government has yet to consider framework legislation for this new form of corporate governance.

National governments around the world are also deeply concerned about the implications of decentralization for sovereignty and the rule of law. While highly secure, blockchain is not the “absolutely unhackable” technology that we were once told it was. Blockchain security is an evolving science and practice.

Perhaps even more worrying from an ethical perspective is the fact that while DAOs may be internally transparent to members, they are not necessarily transparent to everyone else. A DAO like Decentraland is bringing remarkable new ideas and energy to the creation of virtual worlds. Unfortunately, the same basic DAO structure that is powering this and other legitimate businesses (such as Dash) can, in the wrong hands, facilitate fraud, money laundering, trade in endangered species, and other illicit and illegal schemes.

In summary, DAOs will not replace traditional national or multinational organizations in the near future. The key challenge for smart governments, at whatever level, is to develop effective regulatory frameworks that ensure accountability and verification while harnessing the power of decentralization and peer-to-peer corporate governance.