When blockchain technology was introduced, the masterminds behind the DAO idea got the tools they needed to turn their ideas into a real-world project. Blockchain technology brought in the concept of a secure digital ledger. With this technology, all the transactions of the members across the Internet could be tracked digitally. Moreover, it also offered a safe and secure environment to build a Decentralized Autonomous Organization.
Blockchain technology uses a technique which is called trusted timestamping to eliminate counterfeit transactions. A distributed database is held by all the users of the blockchain to remove corruption and the need to include an intermediary. This technology was incorporated into an organization so that it can be run without managerial supervision. This means that the DAO can run autonomously if there are proper rules and flexibility on the platform. And now, Wyoming has received a bill to allow the incorporation of DAO companies.
Decentralized Autonomous Organization (DAO)
A decentralized autonomous organization (DAO) is an organization or business whose decisions are made electronically through a written computer code or via the vote of its members. Basically, it is a system of hard-coded rules that would define all the actions that take place in the organization.
What is a Decentralized Autonomous Organization (DAO)?
To understand this, let us understand digital currencies which are decentralized. This means that they are not controlled by a single government institution or bank. Rather, the control is divided among a variety of computers, nodes, and networks. With this, they also gain a lot of privacy and security that normal currencies and their transactions do not get. Inspired by this, in 2016, a group of developers got the idea to create a decentralized autonomous organization.
A DAO is an organization that was created to be decentralized and automated. It does not have a typical management structure or board of directors and it is based on an open-source code. So that it stays completely decentralized, the DAO was unaffiliated with any specific state or country. The reason why such an organization was created was so that manipulation of investor funds and human error can be eliminated. This is done by placing the decision-making power in the hands of an automated system and a crowdsourced process.
How does a Decentralized Autonomous Organization work?
In a decentralized autonomous organization, every vote or action that takes place is represented in the form of a transaction in the blockchain. And the members who take actions or place votes are represented by their address. These addresses can be owned by anyone including an IOT device, a robot, a human or even another DAO. And this is what makes it an automated system. Also, each member gets a token that acts as the shares of the DAO. These tokens can also be used to vote in the DAO to make a specific decision.
The token is just another kind of contract that is becoming a part of the blockchain. And the more tokens an address has, the more control that address has over the DAO. Every member has the right to submit a proposal that would help them make certain decisions. These decisions include:
- Hire a lawyer
- Hire a vendor to get his/her service
- Fire the CEO
- Change the CEO
- Pay certain USD/ethers to someone as a bonus or salary
- Issue the share to an address since that address is adding more value
In the decentralized autonomous organization, since it is a democracy that runs on the blockchain, the voting power can be optionally entrusted to someone that the member trusts more. It is just the same as voting through a proxy in a real organization. The DAO can also raise funds through crowdsourcing by issuing tokens to anyone who is paying the money. All these transactions take place in real-time unlike the time taken in a real organization which is more than 60 days.
Decentralized Autonomous Organization Examples
With the DAO, we can now have companies that do not have a specific hierarchy or a CEO. This makes the structure one of the best ones to have in any kind of organization. In fact, if regulatory structures allow, then blockchain data could replace a lot of the public records such as missing persons, sex offenders, titles, mortgages, deeds, marriage certificates, and birth certificate records.
With this, healthcare clinics can also function autonomously, software development companies can employ thousands of independent programmers, cab companies can control a fleet of driverless cabs, and so on. This list can just go on when a DAO model is applied to any business. In fact, there are such companies in the real world as well. Some of the examples of the real world include Digix.global and the cryptocurrency Dash.
Dash is a popular digital currency and is an example of a decentralized autonomous organization due to the way it is governed and how its budgeting system is structured. And after some time, we would find many other additional DAOs in the field.
Decentralized Autonomous Organization Advantages
As mentioned above as well, there are a lot of decentralized autonomous organization advantages including:
- Cheap distribution of shares. This is because there is no middleman and the members communicate with each other who want to sell/buy DAO shares. This makes the complete process cheap.
- You can code integration with suppliers in the algorithm. With this, the execution would work based on that interactive algorithm. In case, it is not disputed, the cooperation between the parties would be much cheaper and smoother.
- Members (who are also the shareholders) of the DAO can have a very immediate and direct impact on the company’s operations.
- No single person exists who represents the decentralized autonomous organization. Basically, all the members, including the minors also represent the company collectively.
- You can also code many standard corporation activities in the DAO algorithm. This would help the operations get executed automatically without any human intervention. Payroll, tax payment, auditing, accounting, and anything else, all would be taken care of. This process adds transparency to the operations and eliminates the risk of human errors and lowers employment costs.
- The cheap distribution of the dividends is done directly from the decentralized organization to members.
All these things just make the incorporation of the decentralized autonomous organization such a good idea.
Risks in Decentralized Autonomous Organization
Like all things have both positives and negatives, the DAO too has some risks as well. These include:
- Parties might not be explicitly defined in the smart contract. So, if there is a dispute not covered by the code, it might become difficult to resolve it in the traditional legal system.
- The algorithm cannot do more than what it has been coded for. This means that it can end up making bad or biased decisions in case you do not account for every reasonable circumstance and fact. The only way to overcome this is if the DAO is structured in a way that there is always human interference in it that can take back or stop automatic decisions.
- A lot of the useful DAOs need access to data outside the blockchain. And this data is usually given through semiautomatic or automatic centralized oracle mechanisms. If someone wants to disrupt the operation of the DAO, they can easily attack it via the oracles that the organization is based on.
- Public blockchain networks aren’t controlled by a single party and their evolution can move in an unexpected direction, resulting in DAO disruption. In extreme cases, the DAO can end up becoming unstable and would just end.
- The programming code of the DAO can have bugs that can be difficult to rectify since the smart contract code is immutable (you will need to read more about blockchain to understand it better). And these bugs can cause anything from unexpected liability increment to money loss.
- In case you lose the cryptographic private key or someone steals it from you, you will lose access to the DAO and your voting rights as well. Getting it back even through legal procedures would just not be possible.
Even though there are negative points to this, there are many who are working to overcome these drawbacks and find a way around this.
Decentralized Autonomous Organization (DAO) in Wyoming
Wyoming has decided to take a step ahead and has begun looking into getting the decentralized autonomous organization types included with the other business entity options when someone is opening their new business. Although there are a lot of concerns and potential issues regarding structure, security, and legality, a few analysts and investors feel that this organization would become prominent and would even replace the traditional business structure.
Wyoming’s Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology proposed a bill that supported the options where DAOs can be officially incorporated in the state. The Wyoming legislators have moved to ratify the law that would now allow the incorporation of the decentralized autonomous organizations (DAOs) as a limited liability partnership (LLP) firm or a limited liability company (LLC) under state laws. This bill also permits the existing LLCs to restructure into a DAO LLC.
A decentralized autonomous organization is a not-for-profit or for-profit entity that is crowdfunded by individual investors via cryptocurrency transactions or staking. The rules in the DAO are encoded in and enforced via a smart contract. This is updated only after there is a referendum from the voting entities. The main idea of the DAO is that the company runs on the rules that are enforced digitally. Other decisions in the company are made by the shareholders who control a specific amount of smart contracts, or tokens and can vote for decisions.
To explain better, preprogrammed rules in the system would describe what can happen in the company. Specific rules are hard-coded into the company as the number of dividend payouts or determining a certain event in the company. The other things like figuring out which project would get money is decided by letting all the token holders cast their vote.
Do you need help in Incorporating a Business in Wyoming?
If you are thinking of starting your company and want to choose the decentralized autonomous organization structure, then we can help you with it. IncParadise can also help you to restructure your LLC into the DAO. We can also help you to register and incorporate your company whenever and however you want to. In addition to this, we also offer maintenance services such as mail forwarding, business address, registered agent services, and so on. Contact us to select some of our services or to know more!
This act is effective July 1, 2021.