Are DAOs the employer of the future?

There starts to be some chatter on the interwebs about DAOs being the organisation of the future. It has everything that everyone wants to see in organisations, other people's organisations that is. Is this another case of NimBYism?

Let me add that I agree: DAOs or Organisations with a Decentral Governance are a great thing, but they go against many instincts of managers and administrators and might not be suited for all types of organisations.

It's governance

First of all, it's a misnomer: DAOs are neither Organisations (legal entities) nor are they Autonomous. A bit like a smart contract is neither of those things.

The DAO is not autonomous because it exists on a block chain and the nature of block chains means that it can not act on its own accord. Logic on-chain needs a signed transaction in order to make changes to the state. The transaction can originate from a human, an off-chain process or a combination thereof. But it must originate off-chain.

Therefore DAOs are Decentralised Governance Mechanisms. But I will continue to call them DAOs in the remainder of the article, just for convenience.

Advantages of a DAO

Why is a DAO more desirable than a conventional organisation in the first place? After all, corporations have provided growth and wealth since their enshrinement in law by the Romans and more importantly the recognition of the separation of liability between the owners of the organisation and the organisation itself. This has allowed more risk taking and reaping greater rewards.

The advantage of the DAO resides in three things:

• the efficiency by which its owners can make decisions without the need to delegate the decision making to an executive team.
• the enshrinement of the rules in code and the automated and auditable execution of rules
• the transparency in which the decisions are made and the automated implementation of the decision without the need to rely on the interpretation of the executive team.

This brings a few challenges with it. Assuming that the organisation is successful in mobilising its owners to make decisions, the encoding of those decisions in software is the major challenge I foresee. The three biggest challenges I can see are:

1. Governance as code is hard to get right
2. Transparency is desirable in principle but sometimes hard to accept
3. Compliance with the law is more challenging because the state is not an actor in current DAOs

Code is Law

In a DAO, code is law. This has led to the downfall of the first attempt to implement a DAO investment fund and the split of the second biggest blockchain.

Saying that enshrining Law in software is hard to get right is an understatement. I have worked in software development my entire career and even though the processes and practices have improved a lot, I have a strong impression that we're not quite ready to replicate something as complex as a commercial company in the digital world.

Unbendable rules

Because code is law, anything that has not been taken into account when the code was written, can not be done. Ask yourself this: how many processes exist in my organisation that have no exception?

And as a follow up: When an exception arises, who is in charge of approving it? The answer is invariably: it depends.

Software is complicated

We have tried to program processes for a long time now. The idea is as old as the computer itself but dedicated languages are probably 25 years old. I can think of BPMN which can be transpiled to BPEL for execution. Feel free to add more examples in the comments.

What these efforts have in common is that every time an organisation has tried to apply them, people realised that it is a good idea to solve specific problems but not to implement all the processes of the organisation. And in many cases, steps include a branch out to human decision.

DAOs are different

The main difference is the stage in which automation is thought of: very few organisations have tried to use these techniques from the start. I have never encountered a 10 people startup telling me about the BPMN representation of the organisation. If you know of one, please link in the comments.

In a DAO, this would be the case. So it is a lot easier because it starts early and the processes can be adapted to the code instead of having to adapt the code to the existing processes.

The risk is big that the DAO will spend so much time to get its rules right that there will be no energy left to conduct business. In short: unless your business is to create processes, it is a big distraction.

Transparency

Let's assume the DAO in question has been deployed on the Secret Network and the state of the DAO is only visible to authorised personnel. Just like a conventional organisation. You would not want the world to be able to see your accounting details. But still, some degree of transparency is required.

The first and most important property of on-chain governance is transparency. The proposals must be published before they can be voted on and hence the proposals must be made available to the voters. We can use methods to conceal the content from the general public and make the decisions internal to the DAO. But internal to the DAO means that all the stakeholders get to see the decisions, which means all the token holders. With so many stakeholders, the information is almost certain to leak.

The proposal's argumentation also needs to be made public. Stakeholders can not be expected to vote on a headline; the implementation, effects and arguments must be included in the voting process and hence risk being leaked to the public.

This is true for budgets, hiring rules, salary policy and many other things that a conventional company might want to keep private to the board room or even executive suite.

DAOs and the law

Being on a blockchain, the legal system has only an indirect influence on a DAO. The state can not seize assets secured by private keys and as the processes are implemented in code, it is impossible for the state to prohibit illegal rules.

Unethical hiring practices

Imagine a DAO who votes to fire all employees over 55. This is illegal in most countries and would result in an avalanche of law suits. How can the state force the DAO to revert this decision? In the real world it's easy, but on-chain the code would need to be rewritten and redeployed. Depending on how the change was made, this might not be as straight forward as it sounds.

Getting to the money

Imagine the DAO has filed a sales tax statement and the state decided that it was wrong and the DAO has to pay more than what it expected. Not a major problem if everyone agrees. What if not everyone does because a majority of token holders live in a different country and they resent the fact that the state is greedy.

As an orthodox DAO, this organisation does not have a bank account and holds all its funds in stable coins or other crypto assets. Let's assume, for the sake of argument, that the DAO's management can not override the approval process for the invoice. It's a conundrum for the owners and executives alike.

The state will probably go after the portion of the owners who live in the country. It will demand that they pay up in place of the DAO as these are tax liabilities and taxes must be paid. It will be up to this minority to get their money back from the DAO.

Conclusion

DAOs are not mature enough to be commercial organisations in their own right. Either they're an on-chain representation of a legal entity with full power of attorney given to the executive team and hence not much different from a regular organisation; or they're an implementation of one process: allocation of funds for investment, invoice settlement, or something simple and straight forward like them.

We simply don't have the tools to make sure the decision making process of the DAO owners does not cause operations to come to a stand still and the organisation's bankruptcy.

The DAOs are not harder or easier to implement because of the use of blockchain. They're hard to implement because business processes are complex, wrought with exceptions and the real world mandates human decision making to abide by the laws of society, which are not machine readable.