The web distributed organization versus the company
PremiumDAOs of Web3 differ vastly from regular companies but their structure also exposes them to risks
One of the promises of the new Web3 movement is that it can blow open the construct of the traditional firm using distributed autonomous organizations (or DAOs). The idea of ‘disruption’ has been around in the tech world for some time now. We have mostly seen what some observers call “Uberization" of the firm, while others simply use the catch-all phrase ‘disruption’ to sound intelligent.
Thus far, before the advent of Web3 DAOs as giant killers, all we have had was the formation of online ‘marketplaces’ that let buyers and sellers trade a certain commodity or service while still firmly being planted in today’s Web 2.0 world. These marketplaces have had extra purchase in the provisioning of micro, ground-level transport services—specifically in areas such as ride share aggregators (Ola, Uber) and in markets like intra-city logistics (Porter.in). These marketplaces are great technological breakthroughs in and of themselves, without the use of any Web3 techniques or strategies. They have also, arguably, been highly successful business models. But these ‘disruptors’ are still traditional firms in every sense of the word. They have shareholders, a board of directors, executive management, at least some employees (and quasi employees who are largely shut out of the action), along with a host of regulators, stakeholders and others to deal with daily.
A traditional firm is a nexus of contracts. In simple terms, a regular company is a junction point where various contracts come together. These include contracts for the purchase of raw materials from suppliers, say, as well as agreements with various other entities or people who help the firm make its product or deliver its service. These could be contracts of employment, or with accountants, lawyers and technology firms, or for the procurement of equipment used on a manufacturing shop floor, as also for furniture, fixtures and so on. Then, of course, there are also sales contracts with customers of the product or service.
Ronald Coase, an economist who won a Nobel prize for giving the world a paper called ‘The Nature of the Firm’ published in the journal Economica, had posited that the only reason for firms (or companies) to exist was because external economic conditions forced entrepreneurs or owners to employ people and organize them so as to produce goods and services that could be traded in a more cost-effective way than in a free-for-all market. Then prevailing economic conditions meant that the overall costs of thousands of buyers trading with thousands of sellers in order to produce and buy, say, a motor car, was simply too great; transaction costs alone would probably outstrip the input and other costs of making the car.
So, instead of thousands forming independent relationships for the production and procurement of cars, car-makers like Soichiro Honda and Takeo Fujisawa formed a company, Honda Motor Company, with which thousands of buyers and sellers would trade, thus making Honda a ‘nexus of contracts.’
The DAOs envisioned by Web3 afficionados are a different animal. Web3 runs on blockchain technology, which allows for peer-to-peer contracts without middlemen, or indeed, any need of a ‘nexus of contracts.’ The extension of this means that it is possible to set up distributed autonomous organizations that work solely on trust. As interest in the possibilities of this space has increased, DAOs have begun to experiment with the boundaries of what is possible. There are DAOs for investing, for building new products, for socializing, and many iterations for each of these.
The point of a DAO is to act like a company in the blockchain world, one which is controlled directly by its stakeholders with no governance structures such as a board and executive management. DAOs have many of the same needs as today’s modern firms, but must deal with greater complexities, given their ‘virtual’ form of organization, fluidity and technical stack. DAOs are organized in a flat structure led by a group of core contributors. To make decisions, members submit proposals and vote on them using DAO “tokens" in full public view. Unlike in a corporation, where an employee needs to be vetted and interviewed before being hired and then promoted through to the company’s management, which governs the firm, some DAOs let anyone join while others require a minimum number of tokens (often cryptocurrency).
At this stage, DAOs are early in their evolution, and this has necessitated software tools for DAO formation, communication, collaboration, payments, and so on. DAOs have only a handful of providers to select from across these categories. Their choice is limited. We can expect new entrants to this space in the years to come.
Unsurprisingly, DAOs have already been misused, most famously in the shutting down of an entire cryptocurrency bank called Beanstalk. Two months ago, a DAO vote resulted in the bank’s entire assets being transferred out of it in one go. An attacker had borrowed $80 million in cryptocurrency and deposited it in the DAO’s ‘token’ account, gaining enough voting rights in it to be able to instantly pass any proposal at the bank. With that power, the attacker voted to transfer the contents of the treasury to him/herself, then returned the voting rights in the process of withdrawing the money, and subsequently repaid the loan—all this in a matter of seconds.
Whether in technology or any other field where there are new opportunities, there are also robber barons.
Siddharth Pai is co-founder of Siana Capital, and the author of ‘Techproof Me’.