Revisiting 1602: Is the DAO the New Corporate Paradigm?
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Revisiting 1602: Is the DAO the New Corporate Paradigm?
Over the past year, DAOs have received more attention in mainstream media, revealing both their strengths and weaknesses.
Navigating Web3 tides with focused insights
Original Author: Andrew Singer
Translation: Block unicorn
“Delegating your vote to capable experts in the industry will give owners a stronger, clearer voice in the management of these companies.”
In 1602, the Dutch East India Company was founded—many consider this the world’s first initial public offering, allowing complete strangers to purchase equity shares. Four centuries later, the shareholding model—especially in its incarnation as the modern business “corporation”—has set the pace for much of the economic world.
But decentralized autonomous organizations (DAOs) may soon disrupt the share-based or capitalized business model just as the Dutch East India Company replaced limited partnerships of its time.
Or as some might say: “DAOs are the new LLCs,” says DAO investor Cooper Turley, referring to these leaderless, internet-native entities whose key decisions are typically made through consensus. “Five years from now, companies won’t have equity—they’ll have tokens and be structured as DAOs,” adds well-known investor Mark Cuban, adding, “The future of companies may look very different as DAOs take over traditional businesses.” Others believe DAOs are challenging venture capital firms in the race to fund Web3 projects.
“I think DAOs are already replacing traditional companies,” lawyer Sam Miorelli, active in several DAOs including Curve Finance, told the magazine. “The promise of DAOs is the opportunity to return to historically rooted norms where smart people with good ideas can get funding and build communities around their projects without first securing legal budgets.” These decentralized autonomous organizations possess some unique characteristics. According to law professor Aaron Wright:
“DAOs are not managed by boards or executives but are designed to be governed through democratic, highly participatory processes or algorithms.”
Indeed, they’ve been described as operating “like an online chat room with a bank account,” because “virtually anyone anywhere with internet access can join a DAO, participate in its governance, and share in its profits,” Florence Guillaume, a professor at the University of Neuchâtel Faculty of Law, told the magazine.
The DAO of 2016
Back in 2016, when one of the first decentralized autonomous organizations—the aptly named “The DAO”—was launched on the Ethereum blockchain, things didn’t look so bright. A few months after launch, “The DAO” was hacked, losing $60 million, triggering a fierce split within the still-nascent Ethereum community that ultimately led to a “hard fork” to recover the stolen funds. For a time, “The DAO” cast a shadow over decentralized autonomous organizations.
Today, these transparent community organizations still face serious regulatory and legal challenges: Do they need to pay taxes? Can they open bank accounts or sign legal contracts? Can they sue other DAOs?
Lawyers Louis Lehot and Patrick D. Daugherty write: “There is no ‘model DAO act,’ like there is a ‘model business corporation act.’” They are “legally unprecedented.” Key decisions—such as how to use funds—are often voted on by thousands of members/owners. Needless to say, decision-making can be cumbersome.
Here’s something about DAOs: They’re typically cooperatives hosted on blockchains like Ethereum (but not Bitcoin), capable of processing blocks of software code known as smart contracts, which automatically execute when certain conditions are met. For example, if an airline flight is delayed by four hours (i.e., the condition), a smart contract could trigger a payment via mobile phone to passengers who purchased flight insurance.
Most DAOs raise funds by selling tokens, which grant investors/owners voting rights. If the DAO votes to pay dividends or the token price appreciates, token holders earn money—similar to how investors profit from listed share companies like Coca-Cola.
Better Business Model?
“DAOs have a future,” Tilburg University professor of business and financial law Erik Vermeulen told the magazine, citing their transparency, security, and open-source governance protocols, which allow constant exploration and testing for vulnerabilities. Moreover, they discourage “rent-seeking”—increasing profits through manipulation of public policy or the economy—akin to corporate lobbying for government subsidies. Due to their distributed nature, Vermeulen adds, they aim to prevent natural and political monopolies.
But are they truly superior to traditional business organization models? Not everyone agrees. “Current token systems don’t necessarily prevent monopolies, as some individuals may hold large amounts of DAO tokens and thus control voting outcomes,” Sarah Hammer, managing director of the Stevens Center for Innovation in Finance at Wharton School, told the magazine, adding:
“All DAOs are different—some are structured to promote inclusivity, while others restrict membership through what’s called token gating. Token gating requires DAO members to verify ownership of the DAO’s NFT token in their crypto wallet before accessing the DAO’s Discord server or website.”
“The defining characteristic that sets DAOs apart from past organizations is the use of blockchain as a source of trust,” senior lecturer Eric Lim at the University of New South Wales told the magazine, meaning inputs and outputs of decisions are immutable and auditable. “This represents progress over traditional centralized organizations,” which Lim calls “zero-sum games.”
Over the past year, DAOs have attracted more attention in mainstream media, revealing both strengths and weaknesses. For instance, ConstitutionDAO formed in November, raising $47 million in days to bid on a rare first-edition printed copy of the U.S. Constitution at a Sotheby’s auction.
Described as a “financial flash mob,” the DAO gathered over 17,000 “donors”—a symbolic achievement in many eyes. Had it succeeded, it would have placed the historic document “into many hands” (e.g., in a museum) rather than in private ownership, possibly never seen again.
However, once bidding began, the DAO’s transparent, decentralized structure proved exploitable. Everyone knew exactly how much ConstitutionDAO had raised and what amount it could or would bid. “The problem with ConstitutionDAO is that its maximum possible bid was completely transparent,” explains David Friedberg. “Sellers would simply outbid the DAO to reach its top offer.” Citadel CEO Ken Griffin took the rare document home.
Dissolution wasn’t smooth either, as DAOs can quickly form for special events and then disband. “ConstitutionDAO’s core team struggled to devise a plan to return funds, as contributors argued in online group chats,” reported The New York Times. “The average investment was about $200, but now investors may have to pay nearly as much to retrieve their cryptocurrency.”
Growing Pains
Yet this experience hasn’t discouraged DAO supporters, who argue that growth challenges are expected with any innovation. These entities are designed to thrive in the Web3 era. Moreover, DAO decision-making can be streamlined by implementing digital-age variants like delegated voting, allowing busy owners (i.e., token holders) who lack time to study proposal details to assign their voting power to trusted third parties.
As Paul Brody, EY Global Blockchain Leader, explains: Today, shareholders in large corporations can vote to reject management if performance is poor—but this rarely happens in practice. Delegated voting changes everything. “Delegated voting rights will be revolutionary—not just for DAOs,” Brody told the magazine, adding:
“With widespread investment in blockchain and traditional stock markets, tracking key issues—from executive compensation to carbon footprint—becomes possible. Delegating your vote to capable industry experts will give owners a stronger, clearer voice in company management.”
Wright notes: “Voting schemes based on smart contracts can enable broader participation in decision-making—at least compared to more cumbersome and expensive systems involving ballot collection and verification.” “The availability of smart contract voting protocols may allow some enterprises to adopt customized decision-right distributions among stakeholders.”
DAOs could also transform how projects hire and compensate people. “There’s no doubt DAOs are the future of work,” Anne Connelly, faculty at Boston University Questrom School of Business, told the magazine. “In an increasingly globalized society, the ability to recruit internationally and pay cross-border in cryptocurrency will provide unprecedented competitive advantage.” Connelly says these autonomous organizations offer participants more power than they might have in traditional companies. Workers “gain greater autonomy over work outcomes, and workers from developing countries will be less likely to fall victim to geographic class divides.”
Others remain cautious. “We’re not quite there yet,” says Vermeulen, noting DAOs still suffer technical and operational flaws and may be vulnerable to “Sybil attacks” and “51% attacks.” Guillaume adds: “DAOs may not replace traditional companies but instead offer new alternatives to existing business and social organizations. They will become preferred structures for specific cases—but this will heavily depend on legislation and how DAOs are legally recognized,” further explaining:
“If this type of organization has legal personhood and provides limited liability to its members, entrepreneurs and others seeking legal structures for new ventures may prefer forming a DAO.”
According to Miorelli, open-source legal frameworks and open-source decentralized building blocks are two ways DAOs can bring a future of lower transaction costs for all. “This also applies to funding ongoing projects. The core innovation of DeFi projects—many of which are managed by DAOs—is the returns available when transaction costs drop close to zero and immutable contracts make enforcement of outdated, categorical rules (like accredited investor regulations) impossible.”
Governance Challenges Remain
DAOs must overcome key obstacles—such as decentralized governance structures that sometimes struggle to handle conflict or competition. “Coordinating and organizing activities in decentralized communities is absolutely difficult, complex, and clumsy,” says Lin. Meanwhile, Guillaume adds: “DAO governance structures need to reach a point where managing resources via smart contracts is easier and more adaptable than using traditional organizational structures.”
Still, DAOs cannot fully eliminate human factors and the inherent limitations therein. “DAOs can’t solve human organizational problems—but neither can corporations. No legal or organizational structure can eliminate interpersonal conflict,” says Miorelli, adding that any well-organized effort can attempt to manage such conflicts.
Before declaring DAOs the future of business organization, there are other reasons for hesitation. There’s a risk of convergence—for example, DAOs evolving into companies resembling traditional top-down management. This concerns Brody: “When does a DAO cease being a truly participatory ecosystem and start looking like just another flavor of shareholder—and now stakeholder—owned company, with full-time management teams and a very corporate-like hierarchy?”
Will a DAO just be a company with tokens instead of shares? “Or does it mean more—a high degree of overlap, engagement, and participation between users and owners?” Brody asks. “I think DAOs will become one of several business structures people consider alongside partnerships, sole proprietorships, and corporations,” he continues, though he expects most blockchain businesses will be managed by DAOs and many “protocol-driven tech businesses.”
More Regulation Coming?
Moreover, some DAOs seem too good to be true—like OlympusDAO, which once offered 2,681.5% APY to those willing to stake their OHM tokens. Some see DAOs as nothing more than Ponzi schemes; others believe they represent DeFi’s future. But the buzz around them suggests increased regulation of these internet-native entities may be coming. Will this secure DAOs’ future?
The answer isn’t clear. Hammer points out that while some U.S. states like Wyoming have enacted DAO-related legislation, “many others haven’t. Additionally, some DAOs may specifically implicate federal regulations and securities laws.”
“I don’t think DAOs will quickly replace traditional corporate forms,” Hammer told the magazine. For example, traditional corporations established under Delaware corporate law “contain structures—though imperfect, like proxy voting—that have stood the test of time.”
Furthermore, replacing traditional companies as the dominant mode of business organization “would require a radical transformation of the federal financial regulatory framework, which is unlikely in the near future,” Hammer adds.
Cross-Border Collaboration
Overall, there’s much excitement around decentralized autonomous organizations. “DAOs are the first structure capable of digitally enabling large-scale collaboration in a fully trustworthy and transparent way.”
“With blockchain, a large group of geographically dispersed individuals—many of whom can remain anonymous—can now collaborate while trusting that any decisions made reflect the genuine will of the community,” Connelly told the magazine.
It also involves “a cool blockchain technology that treats everyone in the community equally” and allows “incentive structures unlike those we’re accustomed to.” It’s about inclusive ownership and doing what’s right for the community,” adds Eric Lim. Still, Miorelli warns, DAOs are unlikely to fully sidestep the governance challenges that plague traditional business organizations:
“An entire academic sector is dedicated to optimizing organizations, and I believe DAOs will demand no less discipline than traditional corporations. Regardless of legal structure or name, what matters is the people.”
DAOs also require a mindset of consensus, which may take some getting used to. Eric Lim has participated in several DAOs and says it contrasts sharply with how universities operate. “In a DAO, I must convince almost everyone to fund a project,” he says. “And people are incentivized to talk with me. There’s a shared belief that if valuable projects for the community get funded, the community grows stronger.”
So, do DAOs really represent an improvement over what already exists?
“I’m an optimist—I believe in the intrinsic value proposition of DAOs,” says Eric Lim. “Criticisms of DAOs—that they’re clunky, messy, and hard to manage—are the same criticisms leveled at democratic philosophy. In my view, both are permanent works in progress.”
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