Welcome to Module 8-Course 2 of Mission Web3!
Now that you know what a DAO is, let’s explore the topic of “why” we need DAOs and the purpose they serve.
Why Do We Need DAOs?
Although we’re still in the nascent phases of DAOs, this new paradigm in organizational structure is becoming increasingly pronounced as the structural ecosystem improves. Not just that, the reasons why DAOs came into existence stem from three of their advantages in comparison to traditional governance structures:
Decentralization — as you already know — is the core pillar of a DAO and shapes the nature of this model. To put it simply, instead of relying on central entities, like a board of directors or the C-suites, DAOs are governed by their members.
Each member of the establishment has a say in the decision-making process and have equal rights to suggest changes that shape the future of the organization. In a way, this creates an idea-meritocratic environment where only proposals that have the institution’s best interests are executed. As a bonus, this often leads to new and creative ways to develop products and services.
Another cornerstone principle of a DAO is transparency. This form of organization is powered by blockchain technology, which ensures each member has visibility into the activities, decisions and transactions that happen on the DAO. Essentially, this open-book or “on-chain” concept removes the need for members to ‘trust’ official statements; rather, each transaction can be verified through the public blockchain.
Not only that, smart contracts, which are the foundations of a DAO, add another layer of security for the members as it’s publicly accessible and can be extensively tested before launching. Think software codes instead of legally binding contracts. Once the smart contracts are deployed, it guarantees that all DAO activities must abide by the coded rules and can only be changed via a vote by all members.
3. Perfect for Community-Centric Organizations
DAOs are not only an advancement for businesses around the world, but they’ve also become a top choice for community-driven institutions. These are non-profit organizations and crowd-funded innovations that have united under a common objective or shared principles. In this instance, DAOs, with their automated efficiency, transparency and the lack of central authority give them the advantage of significantly reducing the misusage of funds.
After all, all transactions on the DAO have to be approved by the community and are verifiable. Gone are the days that required trusting the humans in power; DAOs have heralded the concept of verifying among all members of an organization.
The Principal-Agent Dilemma
In the professional world, the principal-agent dilemma is a rather common conundrum. This theory states that if one agent has the power to act on behalf of all other members, it may become a hazard as the acting agent is incentivized to act in their own best interests. An example of this is when the C-suites take excessive risks. If the risks paid off, they might receive a performance bonus; conversely, if the risks were unrewarding, the investors bear the burden.
The nature of DAOs solves the principle-agent dilemma as it eliminates those we like to call “bad actors” — those with malicious intent towards a project. Instead of trusting any ‘agents’ to make the best decision, the future of the organization is determined by the collection of all its member’s interests, which is to fulfill the goal of the DAO.