DAO: Characteristics, Challenges and Strategies of the Emerging Organizational Paradigm

Preface

The book "Reinventing Organizations" categorizes the organizational paradigms in human history into five colors and provides an in-depth analysis of their characteristics. The teal organization is seen as the ideal form of future organizations, characterized by distributed decision-making, self-management, and evolutionary purpose. In recent years, the rise of decentralized autonomous organization (DAO) represents the forefront practice of the teal organization concept. So, has the DAO fully entered the teal spectrum? What is "new" about this organizational paradigm? What challenges does it face in governance? What strategies are currently available to address governance dilemmas? This article aims to provide a brief analysis and reflection on these questions.

Definition and Characteristics of DAO

DAO is an emerging digital organization paradigm rooted in cryptocurrency and blockchain technology. As of August 2024, there are over 50,000 DAOs established globally, with more than 10 million governance token holders and a collective treasury exceeding $21 billion. DAOs have formed a large-scale global social experiment, showcasing the immense potential to reshape human organization and collaboration.

Currently, discussions about DAO mainly revolve around two core features: decentralization and autonomy, with a focus on two aspects: technology and governance. On the technological level, distributed storage blockchain technology and smart contracts that can automatically execute decisions are the most frequently mentioned features. Upholding the principle of "code is law", DAO deploys community rules based on consensus in code form on the blockchain. Once specific conditions for decision execution are met, the code will execute automatically without human intervention, thus reflecting the autonomy of decision execution.

In terms of governance, decentralization is reflected in the shared decision-making power among all members and the democratic nature of the decision-making process. Each DAO issues governance tokens to ensure members share voting rights. The democratic nature of the decision-making process refers to the basic principles of consultative and voting democracy that a DAO follows when collectively governing around proposals. In a typical DAO, the complete decision-making process includes: forming proposals within the community, deliberating on proposals in public forums, and voting on proposals on voting platforms.

DAOs bring members together with the aim of achieving their unique organizational goals. There are many types of DAOs, such as investment, social, and media DAOs. Although specific goals vary by type, generally speaking, DAOs have dual objectives of profitability and achieving a sustainable community. The former requires DAOs to generate profits for their token holders in the dynamically changing crypto market, while the latter emphasizes the importance of realizing the common interests of the community.

In summary, we can define DAO as: a form of organization based on blockchain, smart contract, and cryptocurrency technology, where decision-making power is shared among all members, and community members voluntarily participate in democratic decision-making based on proposals, aiming to achieve commercial profits and common interests of the community.

Governance Dilemma Facing DAO

Despite having an inspiring vision and advanced organizational concepts, the governance practices of DAOs over the past few years have been full of challenges. Many organizations, although named DAOs, vary in their degree of decentralization. Overall, the widely discussed issues mainly include:

1. The trend of centralized decision-making. Many studies have found that the development of DAO communities shows an oligarchic trend, where over time, voting rights and community governance power have returned to a few individuals. From the perspective of token distribution, governance tokens in DAOs are gradually controlled by a small number of "whales" or certain voting alliances, leading to the risk of voting outcomes being manipulated by a few people. In terms of organizational structure, DAO members form different levels of proposal management authority, and institutions symbolizing power centers are gradually established, such as committees and central councils. While this helps improve management efficiency, it also brings the risk of excessive concentration of power, making it a new challenge to ensure the transparency of decision-making at the core of power and the effectiveness of external supervision.

2. Voter apathy and shorter lifecycles. Low participation rates in the governance process are one of the most severe issues facing DAOs. Although members are granted the right to participate in governance and decision-making, the vast majority do not engage in the proposal review and voting process, with at least two-thirds of members exhibiting passivity. Additionally, most DAOs have a short lifecycle; if 6 months without new proposals is taken as the marker for DAO dissolution, their average lifespan is only 18 months. Therefore, designing effective incentive mechanisms to enhance member participation and achieve sustainable development for the organization has become an important challenge for DAO governors.

3. Balancing commercial interests and public interests. Whether from an individual or organizational perspective, DAOs need to weigh the potential conflicts between commercial interests and public interests. In a DAO, many members are only concerned with short-term commercial returns and do not pay attention to organizational governance, leading to a frequent "free-rider" problem, which conflicts with DAO builders who have a long-term vision. From an organizational perspective, pursuing production efficiency and commercial value growth may require a centralized power structure to enhance the efficiency of decision-making and operations; whereas emphasizing public interests necessitates a democratic organizational structure and decision-making mechanism to ensure equal participation of members and transparency of information, which may slow down the decision-making process. Therefore, DAOs need to find a dynamic balance between commercial interests and public interests, achieving a coordinated unity of production efficiency, commercial value growth, and public interest maintenance through reasonable governance structures and decision-making mechanisms.

Strategies for Achieving Sustainable Governance

Overall, DAOs are still in their growth and exploration phases, moving forward through continuous trial and error. To address the governance issues brought by the trend of centralized decision-making, the voting mechanism has been redesigned. Based on "one token, one vote," various new voting models have been proposed, with typical representatives including quadratic voting, quorum voting, and reputation-based voting. In addition, to enhance member participation, many economic incentive and distribution governance models have also been proposed and practiced, such as DAOs typically redistributing tokens to members and the broader community through bounties, equity pools, rewards, tips, and employment contracts. However, even when users are re-empowered, it is still difficult to ensure that everyone participates in every decision. Therefore, many DAOs have begun implementing delegated voting, where members can delegate their voting rights to trusted members, which is seen as the latest practice of DAOs in liquid democracy.

However, it is also important to realize that improving the voting mechanism alone is not enough to solve the governance issues of the DAO. In the decision-making process of the DAO, ensuring the effectiveness of decision communication and negotiation is an indispensable challenge. In fact, compared to traditional organizations, the decision-making power in a DAO is dispersed among different members, making it particularly important to enhance communication mechanisms among members, which is expected to bring more significant organizational benefits to the DAO. Specifically, the practical direction of enhancing member communication mechanisms covers at least three levels: enhancing the ability to resolve conflicts in decision communication, ensuring equality in the communication process among members, and improving the quality and efficiency of communication and negotiation. Through open discussions centered around community proposals, DAO members can share information, exchange opinions, and build consensus, thereby forming community norms and collective values to achieve the sustainable development of the DAO community.

Conclusion: Examination and Reflection on DAO

DAOs embody humanity's latest hopes and imaginations for better organizational forms, directly addressing the issues and pain points of traditional modes of collaboration. They hold the potential to innovate organizational governance mechanisms. However, it is evident that there is a gap between ideals and reality. In the foreseeable future, the process by which DAOs achieve their organizational goals will not be smooth sailing and may even give rise to new problems.

This gap between ideals and reality is not unique to DAOs, but rather a common phenomenon throughout the history of organizational evolution. Regardless of technological advancements, the fundamental issue organizations face always lies in how to achieve and maintain effective governance. If governance mechanisms cannot fundamentally improve, the ideals of blue organizations may merely be a utopian fantasy, and universal values such as equality, freedom, and democracy could become conceptual traps. Furthermore, historical experience repeatedly shows that the early visions of organizations often deviate over time, for example, social media evolving from open interconnectivity to platform monopolies, open-source communities being controlled by commercial capital, and non-profit organizations moving towards commercialization. Such cases are not uncommon, suggesting that the development of organizations often fails to withstand the test of time.

Therefore, we must acknowledge that no organizational design is perfect; the trade-offs and choices in the governance process are key for organizations to address the challenges of sustainable development. Different organizational forms have their pros and cons, and they coexist rather than replace each other. If we view decentralization and autonomy as a spectrum, various historical organizations, as well as different developmental stages of the same organization, exist at different positions along this spectrum. Thus, DAO is not the ultimate answer to all organizational governance issues. Instead of pursuing the establishment of a perfect DAO, we should think about and explore some practical questions: Under what circumstances is it necessary to organize people in a DAO manner? What are the boundaries of a DAO? In a DAO, which decisions are suitable for "collective brainstorming" and which need to be "decided once and for all"? Although these questions may not have standard answers, and a true DAO may never be realized in the real world, idealists can take solace in the fact that the core values pursued by DAOs are the true driving force behind the continuous optimization of human organizational forms.