DAO vs Traditional Organizations Examples, Pros and Cons, Applications

If you’ve traded any blockchain projects, this isn’t the first time you’ve heard about DAOs. Decentralized autonomous organizations powered by communities. From DeFi apps to Bitcoin’s governance.

It’s hard to find a crypto platform that doesn’t have one. But why are DAOs becoming the norm? And what do they do better than traditional organizations?

While you could guess it by the name, DAOs aren’t just a new way of making money. They offer broader applications, both for the trader and the everyday person. Let’s first define what DAOs are, what they’re not, and what they have that traditional companies don’t.

What Is A Decentralized Autonomous Organization (DAO)?

DAOs are collectively-managed companies backed by blockchains (like Ethereum). Developers prefer them over organizations as they offer flexibility and fair opportunities for communities. A DAO is:

• – Organized: Just like you can start a business, a crowdfunding campaign, or a charity. A DAO’s goals aren’t limited only to investing or building better software.
  
  
• – Autonomous: Once the developers set the ground rules, DAOs will govern themselves without anyone’s intervention. The only time someone intervenes is when the community agrees on updating rules (AKA forking).
  
  
• – Decentralized: Both for the goals and the DAOs rules, users are responsible for decisions. Not only there’s no ‘CEO,’ but anyone who follows the rules can become a decision-maker.

To summarise, DAOs approach goals via tokenized governance, communities, and smart contracts. The result is a trustless, flexible, inclusive organization.

The Bitcoin DAO Example

Bitcoin is the earliest example of how these organizations work. It launched in 2009 and has kept updating ever since. For example, the recent Taproot Upgrade is a change in Bitcoin’s rules to make it more secure and low-cost.

Before these updates can take place, there’s a process months before that must be followed:

• – Users go to Bitcoin‘s DAO to discuss their improvements among forum members
  
  
• – If there’s value in the proposition, moderators will submit a formal Improvement Proposal
  
  
• – Once submitted, there’s a time window for users to vote. With enough positive feedback, the improvement will be included in the next update.

These aren’t mere suggestions. Members show exactly how to make the blockchain better because DAOs are open-source. Anyone with coding knowledge can read and verify the blockchain rules.

Mind that DAOs aren’t limited to blockchains. Almost any crowdfunding group fits the description. Charities, neighborhood community groups, investment pools, coworkers and more.

The difference is, the ‘crowd’ both funds the project AND decides where to use those funds.

DAOs vs Traditional Organizations

The difference between both organizations is decentralization. But what does that mean in practice?

In general, DAOs allow anyone to participate via governance tokens. You buy them the same way you’d buy Bitcoin, and you can then use them to create proposals and vote on others’ suggestions. As long as you hold those tokens, you maintain your ‘decision-making power’ on the network.

Organizational Structure

Traditional organizations follow the corporate structure. Every group has a role, and only the highest of the hierarchy manages decisions, whether it’s executives, founders, or board members. You could still participate if you invest enough time and money in climbing this ladder.

There are no organizational levels on DAOs. Any member can vote for decisions and suggest improvements. And the more you contribute compared to others, the more your votes are worth.

However, decision speed is the trade-off.

Centralization

DAOs are flat, decentralized organizations. No member alone can control the blockchain because of the way developers set the rules. Even though you can play by those rules to gain influence, it’s not deterministic.

In an organization, the board members make the decisions. In a DAO, anyone can make suggestions, but only the most voted ones will execute. The winner depends on at least three variables:

1. Staking Quantity: You lock governance tokens on the proposal you want to support. You get them back once the decision is made. Whether in favor or against, whatever side has more tokens staked will win.
   
   
2. Staking Length: While large holders benefit from quantity, small members are still relevant if they stake for long enough. For example, the DAO may reserve spots specifically for the oldest members. Whether it matters more than quantity or not, that depends on each DAO’s rules.
   
   
3. Randomness: No system is error-free. Some will always find a way to dominate, either via loopholes or deep pockets. Randomness prevents these situations, so even if you have the most influence, you won’t win 100% of the time.

Legal Definition

Because there’s no executive team, it’s unclear how the organization will manage risks and liabilities. It’s a self-governing organization backed by a community where only smart contracts (coded functions) execute decisions.

And while some DAOs operate under LLCs, most are not established legally. It might not be the best idea to let the masses decide on your finances, especially in earlier stages. There’s so much uncertainty in business that no program can account for everything.

Traditional organizations don’t bring such confusion, whether it’s limited liability, a corporation, or sole proprietorship.

What Problems Do DAOs Solve?

It’s hard to picture what the world would be like without DAOs. They’re everywhere in crypto, yet not many people know they exist. What difference have they made since the first Bitcoin?

To mention a few:

• – Cryptocurrency DAOs have helped people protect money. If it wasn’t because of all improvements, hacking attacks would be far more common today.
  
  
• – DAOs created trustless finance, AKA decentralized finance (DeFi). Not only do they secure DeFi platforms, but they reward members for participating. Every time you stake a coin for passive income, you’re actually delegating your rights to other DAO members.
  
  
• – DAOs improve blockchains because of flexibility. For example, after the 2016 hack, Ethereum decided to create a new ETH chain, while those who disagreed stayed with the original one (renamed to Ethereum Classic, ETC). ETC kept being cyber-attacked, which made a dramatic difference for investors.

As of early 2022, the ETH price is about 100 times higher than ETC.

What Can DAOs Be Used For?

As flat organizations, tokenization is the broadest DAO application. It allows smaller members to access assets they couldn’t get on their own, both digital and physical. They also allow owners to generate cash flow from otherwise illiquid assets, such as NFTs, memberships, or domains.

Tokenization

Let’s say you bought a .com worth $1M, and you want to sell this domain for $3M. Even if your buyers have high-volume websites, it will take a while before someone accepts the offer. Sometimes, that sale never happens.

What if your domain could make passive income instead? If you own, say, cars.com, then any automotive business can benefit from web traffic. Depending on the domain, rentals can range from $10s to $1000s.

The fact your domain generates cash flow also increases its value and purchase price.

Similar goes for other examples:

• – Tokenize an NFT (e.g., a Bored Ape). The owner solves the liquidity issue while making it more affordable for smaller buyers.
  
  
• – Tokenize real estate or VR land for the same reason.
  
  
• – Tokenize rights as a PoS blockchain validator (AKA delegated staking rewards)

Fractionalization

Tokenization improves the cash flow of illiquid assets. Fractionalization allows collective ownership. And everyone gets what’s proportional to their investment.

The previous domain example assumes you got the million dollars to buy the domain. What if you have $100,000 instead? You can put $100K and share it with someone else, whether it’s one $900k buyer or nine $100k buyers.

The same way you can ‘own Apple’ by buying $100 from their stock. But to actually make decisions, you have to own a sizable percentage. Not with DAOs though.

If you buy the $1M domain with nine people, $100K stands for 10% ownership. If you want to sell it for $3M, your decision has more weight than if someone with 1% ownership wants to sell it for, say, $4M. Then, if you list the domain for $3M and it sells, you get your 10% ($300k), and everyone else their part.

That’s $300k you wouldn’t have made if you had to buy the $1M domain.

Fractionalization offers opportunities and liquidity to traders, and CloudName does just that. Whether you want to buy or rent, you can trade domains in real-time from our marketplace.

DAO Pros And Cons

It seems DAOs outperform traditional organizations, at least in theory. These are still new organization types. And with so much to test and improve, DAOs are, in earlier stages, risky.

Is it a good idea to invest in DAOs right now? Should you create one yourself? What returns can you expect?

To answer all these, consider the top 3 pros and cons:

DAO Advantages

To trust organizations is to trust the teams behind them. However, it’s not uncommon to shift focus from customers to shareholders once the business gets investors. Why risk it on someone else’s decisions when DAOs offer more control?

• – Decentralized: DAO members are interdependent and need no middlemen. Not only does it make them cheaper but scalable. The more people join, the more secure it becomes.
  
  
• – Inclusive: DAOs bring benefits to anyone willing to contribute. New members can leverage other users’ funds by joining investment pools. Larger investors get more control and lower risk, equivalent to activist investing.
  
  
• – Autonomous: DAO’s innovations are creating so many booming businesses. Yield farming platforms, NFT marketplaces, play-to-earn games. Thanks to smart contracts and community governance, these apps become more convenient for everyday people.

DAO Limitations

While many have high hopes for DAOs’ future, they are far from replacing traditional organizations. We haven’t had enough time to see what problems can come up. DAOs are so new that governments don’t yet recognize them legally.

DAOs are flexible, but they don’t start great. Flaws are expected. And if you don’t consider them, you might lose more than what you invest.

• – Decisions take longer than in traditional organizations: Decentralized companies want to benefit the whole, even if it takes time to agree. Still, DAOs need a polarizing goal so that this flexibility doesn’t turn into indecision.
  
  
• – Decisions won’t always benefit you: As DAOs grow, so does the opposition. Because when you put community first, not all decisions will favor you. You could just agree to popular opinion, but what good has ever come from following the masses?
  
  
• – Risk and liabilities are unclear: DAOs don’t have regulations yet because, by definition, don’t allow for intervention. That doesn’t mean there won’t be mistakes, and when things go wrong, how are you going to protect your money? Eventually, DAOs will need to address it within the rules.

Will DAOs Replace Traditional Organizations?

There’s no simple answer for DAOs’ evolution. Will decentralized finance replace our financial system? Will dApps (decentralized applications) reinvent the Internet? Will flat organizations replace hierarchical structures?

DAOs have those three major limitations. You can minimize but not remove them. They’re inherent to smart contracts and decentralization. But do the benefits outweigh these limitations?

Until that happens, traditional organizations will still dominate. At least in finance, where you’re risking investments from millions of people. So far, the biggest DAO is the Uniswap DEX platform, with over 300,000 members and nearly $2 billion in holdings.

We hope this guide has helped you contrast both organization types. DAOs are a work in progress, and not every single one is going to be the real deal. Today, anyone can create a DAO in 10 minutes with little to no technical knowledge.

Before you invest or join one, research the organization. What have they achieved, what features, how many members? Have there been previous incidents? Do they have a history at all? Are there better DAO competitors?

Thinking about these questions already makes you a better trader.