New Organizational Paradigm An In-depth Analysis of All Aspects of DAO

Author: 0x00pluto

Some of my friends who used to work in web2 companies asked me what DAO is. They hear this concept every day and hope to find a more comprehensive introduction to popularize it, so this research topic came up-

Question: What is DAO?

In the process of continuous exploration, I found a lot of articles and materials online (special thanks to the authors of these articles), so I organized these materials according to their structure.

On the one hand, I hope it is useful to everyone, and on the other hand, I want to summarize and improve the learning effect.

1. What is DAO?

1.1. Definition of DAO

DAO stands for Decentralized Autonomous Organization, which means a decentralized autonomous organization. To understand this concept, it is necessary to analyze its three components.

The first time DAO was formally proposed as a concept and defined in a document was in the initial version of the Ethereum whitepaper. Vitalik classified decentralized organizations into two types in the whitepaper, DO (decentralized organization) and DAO (decentralized autonomous organization). Among them, “Autonomous” means that the organization relies entirely on the code deployed in smart contracts to achieve continuous and uninterrupted autonomous operation.

In the future, more advanced mechanisms for organizational governance may be implemented; it is at this point that a decentralized organization (DO) can start to be described as a decentralized autonomous organization (DAO). The difference between a DO and a DAO is fuzzy, but the general dividing line is whether the governance is generally carried out via a political-like process or an “automatic” process.

In the future, more advanced mechanisms for organizational governance may be implemented, and at that point, a decentralized organization (DO) can be described as a decentralized autonomous organization (DAO). The boundary between DO and DAO is sometimes fuzzy, but there is a general dividing line to refer to – whether the governance is generally carried out through a political-like negotiation process (DO) or an “automatic” process (DAO).

Ethereum Whitepaper, December 2014 version

1.1.1. Decentralized

Compared with the common forms of organizational management today, DAO has obvious decentralized characteristics. However, centralization and decentralization are not mutually exclusive. Many DAO organizations rely more or less on centralization to start or maintain, and they have not achieved absolute decentralization. Therefore, it is more accurate to understand from the perspective of freedom, that is, to show organizations with a clear scale of decentralization.

1.1.2. Autonomous

“Autonomous” – translated into Chinese as “自主” (self-governing) or “自治” (self-governance). This is a very important word in my past few years of study and work. It is the “A” in DAO and also represents the expectation of people for artificial intelligence – autonomous agents.

As a new direction, people naturally have different understandings of autonomy. What exactly is autonomy? Does the meaning of autonomy differ in different fields? Does absolute autonomy exist?

Today, let’s take a closer look at the past and present of this term.

Autonomous – Derived from the combination of two Greek words, “Auto” and “Normos”. “Auto” means “self” in Greek, while “Normos” comes from the Latin word “Norma”, which refers to a carpenter’s square. In its original meaning in ancient Greece, “Autonomous” referred to having the authority to govern oneself, establish one’s own laws, and not be controlled by larger governing institutions.

Ancient Greece was not a unified nation like modern states. It consisted of numerous city-states (polis), each of which was an independent political entity with its own governance structure, laws, and customs. Different city-states had different forms of government. For example, Athens was a democracy, while Sparta was a mixture of oligarchy and monarchy. They often competed or conflicted with each other. The word “autonomous” originated from this period, reflecting the desire of these city-states and their citizens to maintain their unique identities, governance structures, and ways of life in a decentralized and competitive environment.

Over time, the concept of autonomy began to apply to individuals, referring to the ability of individuals to act according to their own principles or beliefs. The book “Sovereign Individual,” considered a classic in the cryptocurrency community, delved into the topic of individual autonomy from economic and technological empowerment perspectives.

As technology continues to advance, the term “autonomous” has taken on a new meaning – “machines or systems that can operate without direct human intervention or external control.” Today, “autonomous” is often associated with technology, such as autonomous driving systems. These systems operate autonomously and do not require continuous human supervision. This modern interpretation still carries the core idea of “self-governance,” but its background extends far beyond the imagination of ancient Greeks.

The evolution of the meaning of the word “autonomous” demonstrates how culture, technology, and society shape and change public perception.

1.1.3. Organization

Typically, DAO is seen as a decentralized company. Indeed, understanding DAO from a corporate perspective has significant business and practical implications. However, it is important to clarify that DAO is not a specific organizational entity but a general organizational form. DAO can be not only a company but also any organization that requires human participation, such as cooperatives, online platforms, communities, etc.

1.2. Why DAO Emerged

The structure of teal organizations is decentralized, characterized by self-organization and self-management, with small autonomous teams collaborating to achieve common organizational goals. Currently, many companies are seeking development by transitioning to this new organizational structure.

1.2.1. Evolution of Organizational Paradigms

Reaction – Red Paradigm: In the initial stage, single family, tens of people, not yet formed self-consciousness stage, foraging and hunting, no division of labor, no leadership.

Magic – Magenta Paradigm: Conscious stage, small family, hundreds of members. Self-differentiation, simple cause-and-effect relationship, cognition without abstraction and classification, no concept of large numbers. Death is not real. No organization exists.

Impulse – Red Paradigm: The emergence of tribal and imperial embryonic form, the emergence of organized life, self-consciousness completely bloated, self and others’ world separated. Death is real. The world is full of danger, force, and power. The way of thinking is either black or white, strong or weak, you or me. Division of labor becomes possible, and leaders, soldiers, and efforts exist.

Obey – Amber Paradigm: Agricultural, national and civilized, institutional, hierarchical and organized religious era. Able to understand cause-and-effect relationships and comprehend linear time, anticipate the future. The development of agriculture triggered the transition from tribal to national and civilization. Awareness of others’ feelings and ideas, Piaget. Development of self-discipline and self-control, moral development. Static worldview.

Achievement – Orange Paradigm: New look, effectiveness replaces being the criterion for decision-making, standards of efficiency and effectiveness. Cognitive abilities improve and guide actions. Enlightenment and industrial revolution occurred, World War II happened. Development and enhancement of free will.

Diversity – Green Paradigm: The standard of “effective or ineffective” replaces the amber’s absolute truth of “right or wrong”. Adhere to fairness, equality, harmony, community, cooperation, and consensus, a sense of belonging. Breaking traditions, overturning caste, social hierarchy, patriarchy, institutionalized religion, and structures that need to be resolved. Although orange still dominates in today’s business and politics, green is very popular among postmodern academic thinking, non-profit organizations, social workers, and activists in the community. People who act from a green perspective value relationships more than results.

Evolution – Teal Paradigm: Characterized by self-organization and self-management, small autonomous teams cooperate to achieve common organizational goals. Subdue self-fear; guided by inner legitimacy: the criteria for decision-making have shifted from external to internal; life is a journey that gradually begins: there is ambition, but not ambitious; stripping off social masks, constantly growing towards one’s true self, with inner drive; based on strengths: more gentle and practical attention to limitations and peaceful coexistence with them, replacing judgment with empathy and appreciation, shifting from a problem-solving perspective to a perspective of unleashing potential; gracefully facing adversity: focusing on experience rather than mistakes, transforming into tension for personal growth; wisdom beyond rationality: deepening the experience of various states through regular practice; pursuing integrity: focusing on the bigger picture, recognizing that we are a larger whole; integrity towards life and nature: finding a more authentic and humble position for humanity in the universe;

1.2.2. Organizational Forms

Red Organization: Impulsive – an upgraded version of the magenta paradigm. It uses modern tools and ideas. The use of continuous force, no formal registration or position titles within the organization, not conducive to expansion. Powerful but fragile, the leader is an absolute myth. Not good at planning and strategy, but reacts quickly in the face of threats.

Amber Organization: Medium to long-term planning, stable and measurable organizational structure. The appearance of large-scale systems: large-scale irrigation systems, pyramids, the Great Wall, etc. The development of colonial shipping, commercial warehouses, and plantations, the emergence of Catholicism, etc. The Industrial Revolution occurred. The development of government agencies, public schools, religious organizations, and the military. The development of processes and supply chains, enhanced planning. The development of hierarchical systems, the emergence of global organizations, strict separation of planning and execution, and the appearance of institutions. The appearance of social space, enhanced identity roles, and relativity.

Orange Organization: Religion, multinational companies – Walmart, Nike, Coca-Cola, are deeply influenced by the “Achievement – Orange” worldview in terms of architecture, practice, and culture. A change in scale, benefiting from innovation, responsibility, and the breakthrough of the elite system. The organization is a machine, and orange also has a dark side – innovation and standards (money and society).

Green Organization: Abolish power and hierarchical systems. If the inequality of power always leads to the rule of the upper level over the lower level, then let’s abolish the hierarchical system and grant everyone equal power. Let all employees hold the same proportion of shares in the company, and all decisions must be made by consensus, with no one in a leadership position (or, if necessary, leadership positions rotate). There are three breakthroughs added to the orange paradigm: empowerment, value-driven culture and compelling purpose, and a multi-stakeholder perspective (emphasis on social responsibility).

Teal Organization: Three major breakthroughs: self-management, wholeness, and evolutionary purpose. Teal organizational model: Holacracy, removing middle management (replaced by coaching roles), minimalistic departments, minimal bureaucracy, team coordination, and knowledge sharing. Self-management: The key to effective management is a system based on peer relationships, which does not require consensus or hierarchy. Wholeness: Teal organizations invite people to show their inner wholeness and work with their “whole selves”. Evolutionary Purpose: Teal organizations are seen as living and having their own sense of direction. Organizational members are invited to listen and understand what the organization wants to become and what purpose it serves, rather than attempting to predict and control the future.

1.2.3. Uniqueness of Green Organizational Structure

Self-managed team: Does this mean there are no managers? It can be said yes and no. Green organizations operate based on the principle of peer relationships, where everyone has the decision-making power over their own work, but also has the responsibility to collaborate with others to obtain the support needed for success. In short, employees self-manage and there are no managers to micromanage their daily work.
Freedom of speech: Create an environment where employees have the ability and willingness to express themselves, thus bringing creativity, passion, and productivity.
Evolving organizational purpose: Employees of green organizations are dedicated to meeting the needs of end users or customers. They prioritize and make decisions about their work based on whether the results can help the company meet customer needs in the most effective way. Therefore, green organizations are dynamic and constantly evolving, able to quickly respond to customer feedback in a rapidly changing market.

2. What are the differences between DAO and traditional companies?

2.1. Differences between DAO and traditional companies

2.1.1. Formation

The biggest difference between DAO and traditional companies is that DAO organizations do not come together through legal contracts. The core framework of DAO is rooted in “community”. DAO itself generally does not have a formal leadership or hierarchical system. Core decisions are made by the community through blockchain voting tools. DAO members voluntarily provide value within the community and receive incentives in the form of community tokens.

2.1.2. Trust

The core advantage of DAO lies in the organization rules being recorded and executed by code stored on the blockchain network, following the principle of “Code is law”. This eliminates the barriers and processes of establishing trust, allowing organization members from all over the world to participate in the organization under the constraints of the program. “Building trust through technology” fundamentally reduces the time and economic cost of establishing trust among organization members and between members and the organization.

2.1.3. Information transparency

DAO has high information transparency, with most project codes being open source. Any user can access all the information of the organization. Compared to traditional companies, DAO does not set information barriers, which maximizes internal competition within the organization. Members with high ability and enthusiasm in the community are more likely to obtain influence and support from community members, leading the development of the business.

2.1.4. Objectives, visions, and participation forms

DAOs are generally established with certain purposes, but they do not necessarily revolve around profit, which is completely different from companies. DAOs are in a free and open form, where users can join and leave at any time. At the same time, the boundaries between participants and owners disappear within the DAO. Participants are usually token holders. In addition to the rewards obtained from participating in building projects, participants can also share the economic benefits brought by the development of the organization. This unity in benefits further strengthens the consensus within the organization.

This results in fast liquidity of DAO personnel and resources, but at the same time, liquidity constantly filters members, strengthening the consensus of the DAO. In this process, the DAO develops rapidly, and participating members can obtain good economic benefits from the appreciation of the tokens they hold or the corresponding NFTs, similar to membership cards.

The essence of a DAO is a new form of organization that uses tokens to incentivize and quickly consolidate and strengthen consensus based on blockchain technology. The efficiency improvement of organizational operations brought by DAOs can be said to be revolutionary. Imagine a mature company with 1000 employees, where only a few core members and management are fully committed to the company’s operations with an owner mentality. Other employees are like well-planned parts, and it is already very good if they can complete their assigned work on time and in the expected quantity (this is related to the design of the incentive mechanism of the company, but the incentive mechanism itself is a cost); However, for a DAO with a stable membership of 1000 people that has already formed consensus and clear division of labor, the enthusiasm and capabilities that erupt when everyone actively invests time, energy, and resources into the community will be unimaginable.

2.1.5. Organizational Form

DAOs do not require a tightly-knit organizational structure but make decisions in a decentralized manner. Unlike companies, DAO decisions are made collectively, not by CEOs or executives, and rule changes and implementation happen simultaneously. In fact, members who own or have a predetermined number of native DAO tokens can propose changes to smart contracts, make initiatives, and vote on them, promoting the development and growth of the DAO. The specific methods may vary depending on the specific DAO.

We can see that regardless of how flat the governance structure of a company is, the core purpose of company operations is to maximize the interests of shareholders. This inevitably leads to a divergence of views between employees and management, as well as differences in subjective initiative for work input. DAOs rely on voluntary labor of members based on the establishment of consensus, and the quality of labor is exponentially improved.

Secondly, the actual owners of traditional companies are the investors, and good companies generally close the door to individual investors who want to join early. If a company succeeds, all the value belongs to the investors, and employees can only receive limited labor compensation. However, for DAOs, each member is both a laborer and an owner of the organization. The distribution of benefits and value is safeguarded by code, and the decision-making and operation of the organization are completely transparent. In a sense, the form of DAOs is a more anti-capitalist organizational model.

2.2. Characteristics of DAO Work

2.2.1. Voluntary Commitment is Required

Since the name of DAO is “decentralized autonomous organization,” there is no specific authority. In a “company,” the “CEO” makes decisions and issues instructions to “employees.” In a “DAO,” there is no “CEO” to begin with. Of course, there is no concept of “employees” either. In a DAO, the pyramid structure is basically negated. The premise of working in a DAO is “everyone actively showcasing their special abilities and contributing to the project.” You are always a “proposer” and a “contributor,” and the DAO needs your suggestions and contributions. It can be said that in order to work in a DAO, there needs to be a high degree of alignment between your project and your own interests. When “what you can/want to do” overlaps with “what the DAO should do,” your contribution will be maximized. If you work for a DAO, no one will give you instructions. If you can contribute a lot, you will be recognized as a “core contributor” and receive rewards and honors.

2.2.2. Payment Based on Performance, Regardless of Age, Gender, or Nationality

Another important characteristic of working in a DAO is that you can participate anonymously. In the past, when working for a company, it was necessary to verify a person’s identity, but in a DAO, this common sense is outdated. When you work for a DAO, there is no need to provide personal information beyond what is necessary. Because DAOs are anonymous, payment is also based on contribution. Regardless of your age, gender, or nationality, what matters is your contribution to the DAO. The prehistoric work ethic of “being the first to arrive at work, showing loyalty” and “being loyal to the boss” has become a thing of the past. Welcome to a flat and performance-based society.

2.2.3. Rewards are Usually in the Form of Tokens

Lastly, but not least, the price of contribution is “tokens issued by the project.” If you work for a company, you will “receive fiat currency through bank transfers.” When working in a DAO, it is common sense to “receive tokens in a cryptocurrency wallet.” Accepting fiat currency as a reward can be considered a special case. The tokens received as rewards can be sold on the spot or held and managed as they are. If you believe that your project will grow, you may not sell it, but instead buy more. These tokens are usually called “governance (voting) tokens.” The more you contribute, the more governance tokens you receive. You can reflect your intentions and interests in important decisions of the project. Using tokens as rewards creates a certain kind of gameplay, which is also an innovative aspect of DAOs.

2.2.4. Governance Model of DAO

Early DAOs generally adopt a relatively centralized off-chain governance model, using tools to realize weak constraints on the project team by the community. Mature DAOs tend to prefer on-chain governance, realizing fully decentralized voting and result execution.

On-chain governance is the execution of decision-making through smart contracts, where the voting results from the community directly determine the direction of smart contract operation, unaffected by any entity.

The process of online governance can be understood as a series of code and smart contract executions that are on-chain, transparent, automatic, and tamper-proof, from the upload of proposals to their implementation.

2.3. Differences from Enterprises

3. Real-world Applications and Challenges of DAOs

3.1. Real-world DAOs

If we follow the definition in the original Ethereum whitepaper, none of the DAOs today can be considered DAOs.

The world is constantly evolving, and the term “Autonomous” has undergone a transformation from self-governance to automated operation (governance) in the real world, but in the crypto world, it has gone through a reverse transformation.

Starting from reality, many DAO operators no longer insist on pursuing fully code-based autonomous operation but instead give more space to the social layer, and the meaning of Autonomous has returned to organizational self-governance. It may also be because non-automated DAOs are considered mainstream in terms of what technology can support today. The Ethereum whitepaper also removed the concept of DO in a subsequent update, further blurring the definition of Autonomous in DAOs. And with the popularity of the concept of network state in the past two years, the meaning of Autonomous in DAOs is increasingly closer to its original definition in ancient Greece.

3.2. Advantages of DAOs

Transparency in governance: DAO members vote on various proposals and encode the community governance rules derived from the voting results in smart contracts on the blockchain, making them visible to all members. This achieves transparent governance and breaks the information asymmetry between participants.
Democratic and highly participatory voting: Traditional organizations generally make important decisions through the votes of a few individuals, while DAOs can allow all or most members to participate in partial decision-making and show the voting results to the participants.
Matching rewards based on the contributions of participants: With the support of blockchain technology, the labor and rights of members are accurately quantified, allowing members to receive rewards that match their contributions.
Difficult to tamper with rules, reducing friction costs: As the saying goes, “code is law.” In DAOs, unless a large majority of members vote to change the rules, established rules cannot be tampered with. All parties should operate the DAO according to the pre-determined rules or consensus, which not only reduces transaction costs and communication costs but also reduces the possibility of friction or disputes among members.

3.3. Challenges Faced by DAOs

3.3.1. Challenge of “Code is Law”

The world is complex. Cryptographic technology has brought about more efficient and fair distribution of ownership, and has enhanced coordination among communities with different cultures and interests. Although participants in the crypto field generally agree with the concept of “code is law,” the reality is that only a limited amount of business logic can be executed within smart contracts. It is not feasible to expect that an organization’s entire work can be automated and sustained solely through a set of smart contract code. Many decisions and executions within a community may involve more complex and comprehensive content that cannot be fully constrained by code and smart contracts.

3.3.2. Inefficient Decision-Making Mechanism

Members of DAOs are often distributed around the world, with a wide range of time zones and a high degree of internationalization. If the community needs to make and execute decisions quickly, the process of voting, drafting, and uploading executable code can be too time-consuming, resulting in ineffective and untimely actions.

Currently, most DAOs adopt a “one coin, one vote” decision-making mechanism. However, this decision-making method often requires every member to participate in every decision. This can lead to inefficiencies in the decision-making process. In addition, it also gives rise to the following issues: (1) members have a low willingness to directly participate in decision-making. Not all proposals are directly relevant to the interests of every member, so it is impossible to ensure that every member will invest a significant amount of time to understand the proposal and make a decision; (2) the knowledge, social experience, and professional insights of members participating in voting may be insufficient to support them in making the right decisions, and the voices of professionals may be overshadowed due to their limited governance tokens; (3) the number of proposals generated during the operation of a DAO may increase over time, and members may not have enough energy to participate in the decision-making process for every proposal. It is necessary to differentiate proposals based on professional fields and urgency, reduce the management burden on members, and prevent members from being overwhelmed by the increasing flow of information and falling into a negative emotion of FOMO (Fear of Missing Out).

3.3.3. Technical Security Issues

Code vulnerabilities can lead to security issues and even result in significant losses for DAOs. In 2016, the famous project called The DAO encountered a severe crisis before it even launched, which led to the first large-scale governance of the Ethereum network and eventually resulted in a hard fork of Ethereum.

3.3.4. Unclear Legal Regulations

From a practical perspective, there is also a problem that the legal applicability of DAOs is unclear. For example, DAOs typically create “community wallets.” However, the ownership of these wallets cannot be clearly defined. When income accumulates in the community wallet, who should pay the applicable taxes? These are inevitable topics in the development process of DAOs.

3.3.5. Insufficient development of tools for operating DAO

By early 2022, when you actually try to run a DAO, you will realize the challenge of tool scarcity.

Despite the development of various tools, the question remains whether DAO participants can fully utilize these tools. For example, implementing mechanisms such as “visualizing the contributions of DAO members and automatically allocating tokens” may be a daunting task. Shortage of manpower or bottlenecks will inevitably arise, and we will give up on decentralization. In addition, it is unfortunate that many projects currently have to use centralized services such as Discord and Google Docs for communication.

3.3.6. Barrier of cryptographic knowledge and common sense

Participating in a DAO requires a minimum level of knowledge about cryptography. However, for most people, “Metamask” is foreign. Even if they are interested in DAOs, most users will feel frustrated because they cannot fund Metamask and connect the funds to the desired chain.

“Working in a DAO” is very different from “working in a company”. For those accustomed to the hierarchical working style, this common sense will also be a major barrier to participating in DAOs. Therefore, it can be said that creating a DAO and Web3 startup company from many countries is very difficult.

3.3.7. Lack of corresponding talent

The construction and development of DAOs is not an exclusive stage for a few people (technicians). The entire mechanism design behind DAOs also requires support from professional knowledge in economics, sociology, political science, and other related fields. Currently, the main participants in DAOs are still primarily from technical backgrounds, which leads to imperfections in overall top-level design and detail design, making it impossible to fully map all the functions and needs of the existing real society, and cannot completely solve the problems that arise from company decision-making mechanisms.

3.3.8. Eliminating oligopoly – it’s not just a slogan

Although traditional blockchain projects often chant the slogan of “decentralization”, the end result is often “replacing someone else’s centralization while becoming a new center”. The emergence of “whales” has firmly grasped control of the project in the hands of a few, while most people can only become “speculators” under the control of the house, and over time, the public loses interest in the project and becomes silent.

The original intention of the emergence of DAOs is to change this situation. Traditional industrial projects need “chain reform” while blockchain projects need “DAO reform”. The main focus of this reform is to have a “fairer” economic model, a “more reasonable” Access Control Layer logic, and a “more transparent” financial and decision-making process.

“Eliminating oligopoly” is not under any pressure when it is just a slogan, but the act of eliminating oligopoly itself is even against human nature because “everyone hates oligopoly, but everyone wants to become an oligopoly”. The true charm of DAOs lies in unifying countless scattered individuals into a whole, thereby realizing organizational value. People should “enjoy” being in a DAO organization rather than satisfying their desire for control.

In the future world of DAOs, everyone’s lives will be tied to a large number of DAO organizations. Who wants to live in an “authoritarian dictatorship” society?

3.3.9. DAO Governance Should Adopt Corporate Logic

When I see many people participating in DAO projects, making money and feeling proud, losing money and cursing, ignoring the value concept of DAO itself and focusing on speculation, it reminds me of the lottery store near my house. It is crowded with people in the evening, some are excited, some are sighing, but they are reluctant to leave. It can be said that “welfare lottery” has similarities with many DAO projects in the current era.

Is this absurd? Well, this is reality. DAO gives the ecosystem more possibilities and has real application value. Therefore, we cannot completely focus on speculation in order to ultimately achieve higher returns (of course, I do not oppose speculating when the signals are obvious, because in the early stage of a new track, there will always be arbitrage opportunities brought by a large difference in cognition and information).

I believe that the governance of DAO should be more in line with the logic of corporate governance, rather than the logic of traditional blockchain projects. The huge difference between the two lies in the degree of division of labor and the coordination of organizations.

I believe that everyone has either worked for a company or has already established their own company, so they must know that a healthy company will have three relatively complete systems: a business system, a decision-making management system, and a financial system.

No company can grow and become strong with deficiencies in these three areas. This is because after the organization grows larger, the friction cost of business, decision-making, and financial management will become very high, and once it exceeds the boundary, efficiency will become quite low.

In traditional blockchain projects, the ones that can become strong mainly fall into two categories. One is platform projects supported by actual companies, such as Ethereum Foundation of Ethereum and LianGuairity/Web3 Foundation of Polkadot. The other is products that focus on a certain technological implementation or a specific function, such as Zcash. However, in the field of blockchain, we need a completely decentralized and autonomous entity that can carry significant value, and that is DAO.

Aligning the traditional company’s business system, decision-making system, and financial system with DAO, they respectively correspond to the proposal system, voting system, and treasury. Currently, leading DAO solution providers such as Gnosis and Aragon are developing underlying solutions. The most mainstream one is the combination of GnosisSafe and Snapshot. So if some projects claim to become huge decentralized organizations and these business frameworks cannot be seen, most likely it is just a scam.

3.3.10. Coordination and Unity of DAO Ambiguous Goals

Before we begin this discussion, we first need to determine what ambiguous goals are and what deterministic goals are. In fact, these two concepts are relative.

For example, when I want to eat a McDonald’s Filet-O-Fish burger, that is a deterministic goal, but when I want to eat at McDonald’s, that is an ambiguous goal (not sure what to eat); when I want to eat at McDonald’s, then wanting to eat until full is an ambiguous goal. The inspiration brought by this dialectical relationship can explain what “DAOification” is, which is the ambiguity of governance goals, and the determination of the degree of ambiguity.

Both of these behaviors are equally crucial and determine how much benefit or risk DAO can bring on the basis of the existing mechanism. This process is also the coordination and unity of ambiguous goals.

Let’s take a concrete example. I want to establish an investment-type DAO organization, so the top-level of my ambiguous goal is to obtain dividends from the track (which means making money), and although this ambiguous goal has the greatest freedom, the governance difficulty is also the greatest. Only those with sufficient background can hold it (BITDAO seems to be such an organization at present).

So for me, I definitely cannot accomplish it, so I can only lower the level of ambiguous goals. For example, I want to create an investment DAO for NFT speculation. Considering my sufficient investment (being cut) experience, I think I can manage it well, and in this way, I have set the ambiguous goal of my DAO.

After setting the ambiguous goal, the most important thing is that I must firmly maintain my ambiguous goal (don’t change it frequently) and attract more like-minded people to participate. At the same time, I also need to believe that the community can autonomously move towards this goal.

Many DAO organizations have good intentions, but due to the founder’s excessive dominance and preference for micromanagement (excluding dissenters), they eventually lead to the decline of DAO. As long as the founder or team can provide guidance and protection in terms of direction and strategy, and avoid interfering with tactical matters. Over 70 years ago, there was such a person in our land of China, and he eventually went to Taiwan.

When I first came into contact with DAO, I had a question. I thought that when a large number of scattered individuals are difficult to coordinate and unify for deterministic goals, wouldn’t it be even more difficult for ambiguous goals?

Later, I remembered some interesting stories from Kevin Kelly’s “Out of Control” that I had read in college: for low-level animals like bees or ants, under the premise of a scattered organization (signal transmission is point-to-point) and ambiguous goals (making honey or finding food), they can demonstrate astonishing consistency. Although it is difficult for us to depict or deduce the underlying principles mathematically, it can indeed be achieved. Therefore, we should believe that under the governance of ambiguous goals in DAO organizations, consensus can also be achieved in the end, and continue to develop towards the goals.

3.4. Legal Challenges of DAOs

3.4.1. “Fully Wrapped” DAOs, also known as Automated Companies

DAOs that can be fully wrapped are neither decentralized nor autonomous.

From a national perspective, a DAO that can be completely “wrapped” by one or several legal entities is no different from a traditional company. By designing a comprehensive corporate structure, a DAO submits itself to state management, and the state can decide to ignore (or revoke) its legal status or pierce the corporate veil to hold DAO contributors liable.

This is why all carefully designed DAO limited liability companies, from Wyoming to the Marshall Islands, are destined to fail legally. DAOs face legal risks because they are incompatible with the governing protocols of today’s legal and financial systems. DAOs are not backwards compatible. Legislative patches may fix some decentralized issues, but any solution that relies on centralized state actors will inevitably sacrifice the values represented by decentralization and autonomy.

It should be clear that traditional companies are not wrong, and it is not wrong to establish your company on traditional legal and financial protocols! Not all companies should become DAOs. In terms of executing vision, bringing products to market, and coordinating complex actions across time and space, a hierarchical command structure may be far more effective than a democratic community. Delaware’s corporate law, honed over decades, has become the best corporate regulatory system in the world, empowering the most successful economies in history. There is no shame in playing this game.

Some traditional companies call themselves DAOs because they automate their administrative and governance intelligence through tokenization and smart contracts. When a manufacturing company automates its assembly line by replacing workers with robots, that in itself is not a reason to modify the company’s organizational structure. The same logic applies to software companies that attempt to automate by using smart contracts to replace lawyers and accountants. Because these companies are neither decentralized nor autonomous, I lean towards calling them automated companies (which is consistent with Vitalik’s description of decentralized organizations and can often be called “traditional companies dressed in decentralized application clothing”). However they are called, the fact is that they do not pose fundamental new legal problems, as existing corporate law can solve everything.

Therefore, fully wrapping a DAO in one or more entity structures may be the best way for key contributors (such as founders, CEOs, or highly prominent developers) to maintain effective control over the protocol or finances, or to interact with the external world on behalf of the DAO through asset acquisitions and employee hiring. Proven corporate entity structures provide the best protection against attempts to hold these key contributors personally responsible for DAO actions.

3.4.1. Ecosystem: Enterprises as DAO Members

If these members do not have any additional rights or powers compared to other DAO members, then decentralized autonomous corporations can welcome companies as members without sacrificing decentralization or autonomy. From the perspective of the governance contract of the DAO, company members can be treated like other members. Drawing from the experience of C-Corps, I call these entities D-Corps (I welcome better names).

The most common form of D-Corp is DevCo, which is a development company that employs a core team of developers. In fact, most DAOs that require professional developers are not started as DAOs, they usually originate from regular tech companies, and most tech companies are C-Corps or LLCs in Delaware.

Once the DAO architecture is built and the DAO is established, a crucial decision must be made: whether the development company should become the enterprise wrapper of the DAO.

If the answer is “yes,” you may have what is called an automated company or the traditional enterprise mentioned above.

If not, the development company should transfer governance responsibilities to the DAO from a technical and legal perspective. The most important steps are as follows: (1) isolate the assets of the development company from the assets of the DAO, (2) clearly transfer control over the governance contract of the DAO from the development company and its employees to the DAO and its members.

After these steps, the development company can (and often does) continue to provide services to the DAO as the primary service provider and be paid from the DAO treasury according to the contract provided by the DAO. Similarly, the DAO can welcome other companies as members; we see this when the DAO needs certain key services (such as legal entity structure) that individual operating members cannot provide independently. Therefore, they either bind themselves to the entity that employs them or form a D-Corp branch with the DAO members. In this way, the organic ecosystem of D-Corps can come and go as members freely, without sacrificing decentralization and autonomy.

The ultimate goal is for each D-Corp to be an alternative service provider for the DAO. Carefully designed architecture and governance structures are crucial here to avoid centralization risks. If the development company continues to have critical control over the finances of the DAO and veto power over governance voting, then the true DAO is essentially non-existent (of course, this is fine, but it should be a decision made with open eyes).

Bridge-Corps are another type of DAO member, so named because they allow the DAO to connect to traditional legal and financial protocols that cannot be fully utilized on-chain. They serve very specific and limited purposes and can be dissolved at any time when no longer needed. Unlike corporate DAO members, these entities are legally independent, although in practice they are subject to a series of their own limited tasks and binding DAO voting obligations.

Very few DAOs start as decentralized organizations, let alone true autonomy. Usually, starting centralized and going through the process of decentralization is easier. Bridge-Corps are key to effective decentralization, as they handle tasks such as opening bank accounts, signing contracts, hiring employees, paying taxes, appearing in court (and many other functions) during this transitional phase. Initially, a single entity can perform all of the above functions, but the requirements of decentralization make it only a temporary solution. By distributing assets and risks among multiple entities through a series of bridge-corps, it ensures that malicious actors have no targets. Once on-chain solutions emerge and are adopted by the DAO to solve the same problems, bridge-corps can retire.

A foundation company is the most common tool for bridge companies, and it is the most bare-bones legal entity that DAOs can use to open accounts and sign service contracts. Other entities are also becoming more popular, such as Guernsey purpose trusts that hold intellectual property assets, and British Virgin Islands limited companies that can issue tokens.

3.4.1. Company-less DAOs: “True” DAOs

For decentralized autonomous organizations, the purest and most legally risky entity structure is one that fundamentally does not have a company structure.

DAO is an inherent concept of anarchism. The term “autonomous” in DAO does not mean “automated,” but rather the literal meaning of “autonomous.” Autonomy is a term and concept of anarchism, as can be seen from the “autonomous center” established by anarchists in the Pacific Northwest in the summer of 2020, Hakim Bey’s “temporary autonomous zone,” and similar uses of this concept. True DAO does not mean being attached to a national charter or limited to complying with a specific set of narrow laws. True DAO should not dissolve just because the Wyoming Secretary of State thinks it should. —Gabe Shapiro|Wyoming’s legal DAO-saster

An intangible DAO is the ultimate ideal form of a permissionless order, a distributed enterprise coordinated entirely through incentive mechanisms. In terms of scale, DAOs provide stability through composability, avoiding the risk of organizational hardening, and contributors and organizations can seamlessly transfer resources and talent to where they are needed.

This is the promise of a mature DAO: to form a stable legal order without the need for coercive intermediaries.

Today, few DAOs can achieve this ideal state. Almost all intangible DAOs act as temporary protective mechanisms against legal risks, either in the form of wrapped or ecosystem-based DAOs. There are few legal precedents for intangible DAOs. Truly decentralized and autonomous organizations are not strangled by the fate, no one or entity is coerced, and there are no obvious channels for outsiders to command and control the resources of the DAO. In other words, centralization and governance itself are the most significant legal risks that DAOs cannot ignore, leaving obvious vulnerabilities to litigants, regulators, and coercive market actors such as banks.

If governance is a source of risk, then eliminating governance can reduce risk. Several projects are adopting this approach, such as Reflexer (look at their “ungovernance” process, and they have been seen as “ungoverned” since the inception). These projects’ experiments are closely watched by lawyers who hope to generalize these experiences.

For fully wrapped DAOs, company law can almost completely solve their legal problems. For DAOs without legal entities, the situation is completely different. We still have a long way to go, but it is increasingly clear that decentralizing rights to DAO resources and automatically eliminating human discretion is still one of the best ways for DAOs to achieve autonomy. Consensus is forming around “legal decentralization,” which is an emerging legal practice that helps DAOs reduce legal risks and achieve these goals.

Even after achieving decentralization, autonomy, or “ungovernance”, risks still exist. After all, tax officials must get a share of the pie. Because true DAOs have natural immunity, the focus may shift from the DAO to the contributors themselves – let’s go back to the limited liability issue discussed in the first part.

Fortunately, our community is rapidly iterating solutions to protect contributors who do not choose packaged, D-Crops, and bridged architectures.

4. Outlook for DAOs

The original definition of DAO represents an ideal, an expectation of technological empowerment, although it is not currently achievable, it is a beautiful and pure pursuit.

Now that hundreds or even thousands of DAOs have emerged, we have sacrificed the robustness of the technical layer and compensated with the cultural layer, allowing community members with shared values to organically come together, using blockchain technology for more powerful coordination, incentives, and distribution of ownership, creating many patterns and achievements that did not exist in this world, which is also fortunate for this era.

In the past, my view was that with the development of encryption technology and the improvement of infrastructure, DAOs will gradually reduce their dependence on people. Today, we may still be managing community treasuries manually using gnosis’ multi-signature method, but tomorrow we may connect the proposal system and treasury system to achieve the automation of fund allocation. The day after tomorrow, we may put the roles in DAO on-chain in a certain way to achieve the automation of key role allocation. The automation system gradually erodes human roles, and ultimately, at a certain point in time, DAO will transition from being dependent on humans to being completely reliant on code.

However, with observations of more projects and the development changes of different DAOs over the years, I have come to believe that the current community DAOs and the envisioned DAOs that operate autonomously should be fundamentally different species, and they will take completely different paths in the future instead of merging at a certain point in time.

There is indeed a lot of room for improvement in the automation level of people-centric DAOs to improve efficiency, coordination, and trust, but the value creation entity will always be the community, every individual in the community. People will always be important.

On the other hand, for DAOs that rely entirely on code, their starting point may be something else, such as – Autonomous World

4.1. AW (Autonomous World)

Autonomous World, often abbreviated as “AW,” is a concept first proposed by 0xLianGuaiRC in 2022. After a year of fermentation, it has begun to be discussed more and more. The Autonomous World is a relatively complex concept, and many people see it as a concept in the direction of full-chain games, but I don’t think so. It is a crossroads of technology, culture, politics, philosophy, and other fields.

In the concept of the Autonomous World, the world is not specifically referring to the place where humans live, but rather a container, a place that accommodates rules and narratives. The world where humans live is of course a world, but “The Three-Body Problem” is also a world, existing in books, Bilibili, Tencent Video, and people’s minds. “Chinese Paladin” and “The Lord of the Rings” are also worlds. The world is not necessarily related to stories, for example, chemistry can also be considered a world. It also provides a container and has its own rules.

After a brief explanation of the concept of the world, let’s take a look at what an autonomous world is. In terms of definition, 0xLianGuairc believes that an autonomous world is a “world with blockchain as the underlying technology”.

4.2. Rules

Autonomous Worlds have hard diegetic boundaries, formalised introduction rules, and no need for privileged individuals to keep the World alive.

An autonomous world has strict diegetic boundaries, formalized introduction rules, and does not require privileged individuals to maintain its existence.

This sentence describes the three core characteristics of “autonomous worlds”:

1. Strict (Hard) diegetic boundaries: This means that the world has a set of fixed and immutable baseline rules. They do not change with time or circumstances, providing stability to the world.

2. Formalized introduction rules: This indicates that there are clear and fixed rules for entering and participating in the world. These rules include how to become part of the world and how to interact within it.

3. No need for privileged individuals to keep the World alive: This world is self-sustaining and does not rely on any specific individual or organization to maintain or manage it.

From this perspective, Autonomous Worlds are actually closer to the original definition of DAO – autonomously operating under predetermined rules, without relying on a specific individual or soft rules similar to political coordination processes. In other words, DAO itself is a form of autonomous world.

What is the charm of such an autonomous world? I believe it is objectivity.

The reality world we live in is objective, no one owns this world, and this world does not exist because of any individual or organization. The fundamental laws that maintain the existence and operation of this world are the laws of physics. Everyone can exert influence on this world in accordance with the laws of physics and make this influence a objective fact in this world.

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