When DAOs it make sense?

Excuse the pun, I couldn't resist. Let's talk about DAOs, and when they're most relevant.

DAOs (decentralised autonomous organisation) are communities where members enjoy ownership and governance rights.

The model isn't new

The concept of a DAO isn’t new — cooperative societies have existed for a while.

The Mondragon Corporation was founded on cooperative principles in 1956. As of 2019, The Mondragon Corporation had more than 80k employees and turnover in excess of €10 billion.

Where is the magic sauce?

The magic sauce in DAOs is being able to govern using software.

Once the community agrees on a decision, this is written into the blockchain leaving little room for malpractice. For example, if the community agrees to retain 10% of transactions in its treasury, this is automatically executed on the blockchain (e.g. Ethereum). On the flip side, the governance of cooperative societies depended on humans. They still need people to control their bank accounts, and this leaves room for malpractice.

The ideal conditions for a DAO

DAOs are exciting. The decentralised governance structure they rely on works well when:

  • Operational complexity is low because it's easier to model operations using software, and there are fewer edge cases.
  • Anti-censorship is important. It's harder to censor content that is distributed and decentralised.
  • Value is shared inequitably. If so, a DAO can meaningfully improve outcomes for customers (e.g. Mirror.xyz allows you to earn more than Medium).

To be clear, DAOs have their own problems - see MakerDAO's black Thursday. But I'm excited about the prospect of a decentralised future, when the conditions are right.