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DAO: The Core Characteristics, Governance Challenges, and Strategies of an Emerging Organizational Paradigm

· 11 min read

By Jia Fan

(PhD Student, Department of Media and Communication, City University of Hong Kong, Eurybia Researcher)

In the book Reinventing Organizations 1, Laloux categorizes historical organizational paradigms into five colors and provides an in-depth analysis of their respective characteristics (see Figure 1). Among these, teal organizations are considered the ideal form of future organizations, characterized by distributed decision-making, self-management, and evolutionary purpose. While the description of teal organizations in the book remains largely theoretical, the recent rise of Decentralized Autonomous Organizations (DAOs) represents a cutting-edge practical application of teal organization principles. This article aims to analyze and reflect on whether DAOs have fully embraced the teal spectrum, what makes this organizational paradigm novel, the challenges faced in governance, and current strategies for addressing governance dilemmas.

Figure 1
Figure 1 - Spectrum of Five Types of Organizations
Note: From bottom to top: Red, Amber, Orange, Green, Teal organizations.

1. Emergence: What is a DAO? What are its features?

DAOs are a new digital organizational paradigm rooted in cryptocurrency and blockchain technology. According to the professional data analytics platform DeepDAO 2, as of August 2024, over 50,000 DAOs have been established globally, with more than 10 million governance token holders and collective treasury amounts exceeding $21 billion. There is no doubt that DAOs have formed a vast global social experiment, demonstrating significant potential for reshaping human organization and collaboration.

While academia and industry have yet to reach a consensus on a definition of DAOs, the discussion primarily revolves around decentralization and autonomy, focusing on both technical and governance aspects. On the technical side, distributed storage blockchain technology and smart contracts capable of automatically executing decisions are commonly cited features 345. Blockchain not only provides a decentralized infrastructure for the operation of DAOs but also supports the deployment of smart contracts. Adhering to the principle of "code is law", DAOs encode community rules based on consensus into blockchain code. Once specific conditions for decision execution are met, the code executes automatically without human intervention, embodying the autonomy of decision execution. A common example is when a majority of members vote in favor of a proposal regarding fund allocation, the smart contract will automatically transfer funds to the corresponding blockchain account. It should be noted that many complex decisions cannot be encoded as program rules, and thus not all decision executions use smart contracts.

On the governance side, decentralization is reflected in shared decision-making power and the democratic nature of the decision process. Shared decision-making power means dispersing decision-making authority from a few agents to all members. According to the community rules of a DAO, all members have the right to propose and participate in the review of community proposals. More distinctively, each DAO issues governance tokens to ensure shared voting rights. Governance tokens, a virtual currency asset with both incentive and governance attributes, are collectively held by all members and used for voting on proposals. The democratic nature of the decision process refers to DAOs following the basic principles of deliberative and voting democracy when making collective decisions around proposals. In a typical DAO, the complete decision-making process includes: forming a proposal within the community, deliberating the proposal on a public forum, and voting on the proposal through a voting platform (see Figure 2). Additionally, autonomy at the governance level is somewhat ambiguous and is often interpreted as participant autonomy. This is typically seen as a result of decentralized governance—under the dual incentives of shared economic gains and a democratic culture, DAO members voluntarily and actively participate in community building.

Figure 2
Figure 2 - Complete Decision-Making Process in a Typical DAO
Note: Starred steps indicate necessary steps. Parentheses contain common governance platforms.

Furthermore, DAOs bring together members to achieve their specific organizational goals. DAOs come in various types, such as investment, social, and media (see Figure 3). Although specific goals vary by type, in general, DAOs aim to achieve both profit and sustainable community. The former requires DAOs to generate profits for their token holders in the dynamic crypto market, while the latter emphasizes the importance of achieving community common good. In fact, the emphasis on community interests is considered the fundamental distinction between DAOs and their original concept, decentralized autonomous corporations 6.

To summarize, we can define a DAO as: an organizational form based on blockchain, smart contracts, and cryptocurrency technologies, where decision-making power is shared among all members, community members voluntarily participate in proposal-based democratic decision-making, and the organization aims to achieve commercial profitability and community common good.

Figure 3
Figure 3 - Categories and Examples of DAOs

2. Contrary to Expectations: Emerging Governance Challenges

Despite inspiring visions and advanced organizational concepts, the governance practices of Decentralized Autonomous Organizations (DAOs) over the past few years have been fraught with challenges. While many organizations adopt the name DAO, their degree of decentralization varies significantly. Broadly, the problems discussed widely include:

  1. Centralization Trends in Decision-Making

    Many studies reveal that DAO communities exhibit oligarchic trends, with voting rights and community governance authority gradually reverting to a select few over time. From a token distribution perspective, governance tokens in DAOs tend to be controlled by a minority of "whales" or certain voting coalitions, thus increasing the risk of vote manipulation by a small group.7 In terms of organizational structure, DAO members form different levels of proposal management authority8, and institutions symbolizing centers of power, such as committees and central councils, gradually emerge.9 This can enhance management efficiency but also brings the risk of excessive centralization, making it challenging to ensure transparency in decision-making and the effectiveness of external oversight.

  2. Voter Apathy and Short Lifespans

    Low participation rates in governance processes represent one of the most severe issues facing DAOs. Despite being granted the right to participate in governance and decision-making, the majority of members do not engage in proposal review and voting processes.10 At least two-thirds of members display apathy.11 Additionally, most DAOs have short lifespans.12 According to statistics from Rikken et al., if six months without new proposals is considered a sign of dissolution, the average lifespan of a DAO is approximately 18 months.13 Thus, designing effective incentive mechanisms to increase member participation and achieve sustainable development becomes a critical challenge for DAO governance.

  3. Balancing Business Interests and Public Good

    Both individually and organizationally, DAOs need to balance the potential conflict between business interests and the public good. Within DAOs, many members focus solely on short-term commercial returns and ignore governance, leading to frequent "free-rider" problems, which conflict with the long-term vision of DAO builders. From an organizational perspective, pursuing production efficiency and business value growth may require centralized power structures to improve decision-making and operational efficiency; however, emphasizing the public good necessitates democratic organizational structures and decision-making mechanisms to ensure equal member participation and information transparency, which could slow down the decision-making process. Therefore, DAOs must find a dynamic balance between business interests and the public good through reasonable governance structures and decision-making mechanisms, achieving a harmonious coexistence of production efficiency, business value growth, and public interest maintenance.

3. Breaking the Deadlock: Strategies for Sustainable Governance

In general, DAOs are still in their growth and exploration phase, continuously learning from trial and error. To address the centralization trends in governance, voting mechanisms have been redesigned. Building on the "one token, one vote" (1T1V) model, several novel voting models have emerged, including quadratic voting, quorum voting, and reputation-based voting.14 Furthermore, to increase member engagement, various economic incentive and distribution governance models have been proposed and implemented, such as bounties, staking pools, rewards, tips, and employment contracts to indirectly redistribute tokens among members and the broader community. However, even when users are re-empowered, it remains difficult to ensure everyone participates in every decision. As a result, many DAOs have begun implementing delegation voting, where members can delegate their voting rights to trusted peers, which is seen as the latest practice of liquid democracy in DAOs.

However, it is important to recognize that improving voting mechanisms alone is insufficient to solve the governance problems of DAOs. Ensuring the effectiveness of decision-making communication and negotiation is a crucial challenge in DAOs. Compared to traditional organizations, the decision-making power in DAOs is distributed among different members, making the improvement of communication mechanisms between members particularly important and potentially beneficial for the organization. Specifically, enhancing communication mechanisms includes three main aspects: improving conflict resolution capabilities in decision-making communication, ensuring equality in the communication process among members, and increasing the quality and efficiency of communication and negotiation. Through open discussions around community proposals, DAO members can share information, exchange opinions, reach consensus, and develop community norms and collective values4, contributing to the sustainable development of the DAO community.

4. Epilogue: Reflections on DAOs

DAOs carry the latest hopes and imaginations of humanity for better organizational forms. They address the issues and pain points of traditional collaboration methods and have the potential to revolutionize organizational governance mechanisms. However, it is evident that there is a gap between idealism 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 disparity between idealism and reality is not unique to DAOs; it is a common phenomenon throughout the history of organizational evolution. Regardless of technological advancements, the fundamental challenge for organizations remains how to achieve and maintain effective governance. If governance mechanisms do not fundamentally improve, the concept of teal organizations might remain an utopian fantasy, with values such as equality, freedom, and democracy potentially becoming conceptual traps. Furthermore, historical experience repeatedly shows that the early visions of organizations tend to deviate over time. Examples include the transformation of social media from open networks to platform monopolies, commercial capital taking control of open-source communities, and non-profit organizations becoming commercialized. Such cases suggest that organizational development often does not withstand the test of time.

Therefore, we must acknowledge that no organizational design is perfect, and the trade-offs and decisions made during governance are key to addressing sustainability challenges.15 Different organizational forms each have advantages and disadvantages and coexist rather than replace one another. If we view decentralization and autonomy as a spectrum, historical organizations and different stages of the same organization occupy various positions along this spectrum. Thus, DAOs are not the ultimate solution to all organizational governance problems. Instead of striving for a perfect DAO, we should consider practical questions: under what circumstances is it appropriate to organize people through a DAO? Where are the boundaries of a DAO? Which decisions within a DAO are best suited for "collective wisdom," and which require "decisive action"? While these questions may not have definitive answers, and a true DAO may never fully materialize in the real world, idealists can take solace in the fact that the core values pursued by DAOs are the true source of motivation driving the continuous optimization of human organizational forms.

Footnotes

  1. Laloux F. Reinventing organizations: An illustrated invitation to join the conversation on next-stage organizations[M]. Nelson Parker, 2016. ↩

  2. https://deepdao.io/organizations ↩

  3. Hassan S, De Filippi P. Decentralized autonomous organization[J]. Internet Policy Review, 2021, 10(2). DOI: 10.14763/2021.2.1556 ↩

  4. Ellinger E W, Gregory R W, Mini T, et al. Skin in the game: The transformational potential of decentralized autonomous organizations[J]. MIS Quarterly, 2023, 48(1): 245-272. DOI: 10.25300/MISQ/2023/17690 ↩ ↩2

  5. Singh M, Kim S. Blockchain technology for decentralized autonomous organizations[M]//Advances in computers. Elsevier, 2019, 115: 115-140. ↩

  6. DAOs, DACs, and On-chain Org Design: A DAC Manifesto, https://operator.mirror.xyz/6SGQA4dsexVJM6K44ypb_hP9PgHr39Tv_EIvD7hQSQo ↩

  7. Sun X, Chen X, Stasinakis C, et al. Voter coalitions in Decentralized Autonomous Organization (DAO): Evidence from MakerDAO1 2[J]. 2022. DOI: 10.48550/arXiv.2210.11203 ↩

  8. Understanding Discourse Trust Levels, https://blog.discourse.org/2018/06/understanding-discourse-trust-levels ↩

  9. Alawadi A, Kakabadse N, Kakabadse A, et al. Decentralized autonomous organizations (DAOs): Stewardship talks but agency walks[J]. Journal of Business Research, 2024, 178: 114672. DOI: 10.1016/j.jbusres.2024.114672 ↩

  10. Liu X. The Illusion of Democracy? An Empirical Study of DAO Governance and Voting Behavior[J]. SSRN Electronic Journal, 2023. DOI: 10.2139/ssrn.4441178 ↩

  11. Bellavitis C, Fisch C, Momtaz P P. The rise of decentralized autonomous organizations (DAOs): a first empirical glimpse[J]. Venture Capital, 2023, 25(2): 187-203. DOI: 10.1080/13691066.2022.2116797 ↩

  12. Peña-Calvin A, Arroyo J, Schwartz A, et al. Concentration of Power and Participation in Online Governance: the Ecosystem of Decentralized Autonomous Organizations[C]//Companion Proceedings of the ACM on Web Conference 2024. 2024: 927-930. ↩

  13. Rikken O, Janssen M, Kwee Z. The ins and outs of decentralized autonomous organizations (DAOs) unraveling the definitions, characteristics, and emerging developments of DAOs[J]. Blockchain: Research and Applications, 2023, 4(3): 100143. DOI: 10.1016/j.bcra.2023.100143 ↩

  14. Voting Mechanisms in DAO, https://wiki.fintechlab.unibocconi.eu/wiki/Voting_Mechanisms_in_DAO ↩

  15. Zhou Xueguang. Ten Lectures on Organizational Sociology[M]. Social Sciences Academic Press, 2003. ↩