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TCA Spring 2022 Small Business Forum: Are DAOs the New Coops?

By NSAC HQ posted 03-25-2022 11:56

  

Originally published in The Cooperative Accountant, Spring 2022 Issue

There has been extensive media coverage surrounding Bitcoin but DAOs (Decentralized Autonomous Organizations) are utilizing the same blockchain technology to revolutionize organizational structure.  DAOs have garnered a large amount of capital and attention in the last year. In August 2021, BitDAO raised $365 million, $230 million of which was secured within 20 minutes of going live (Genc 2021). Other interesting DAOs include Krause House DAO formed in November 2021 with the mission of buying an NBA team. It has currently raised $1.7 million dollars. The DAO market is growing rapidly. By 2020, it exceeded $3 billion in capital, and it is expected to reach 37.8 billion by 2025 (Iredale 2020). This amount of growth leads to the question, what is a DAO and how does it relate to a Coop?  

What is a DAO 

A decentralized autonomous organization (DAO)1 is an organization where the rules of the organization are encoded into a computer program called a Smart contract. A Smart contract is analogous to a regular contract, it is simply a set of rules between two parties. The primary difference is a Smart contract is self-executing, requiring no human intervention. This difference may seem trivial but when many Smart contracts are combined it is possible to create a fully autonomous organization. 

Smart contracts are maintained on a blockchain which is a cryptographically secure public ledger. Smart contracts cannot be modified without approval of DAO members.  Ethereum and Solana are popular blockchains for storing and maintaining smart contracts. 

DAOs are decentralized in that they are not controlled by any central authority or system and instead run on a decentralized network of computer nodes. It is not possible to stop Smart contracts from executing by turning off a single node. In fact, a DAO’s code is extremely difficult to alter once the system is setup and running.  

How decisions are made in a DAO 

Membership in a DAO is typically represented by tokens which can be purchased, earned through work, or earned by using the DAO’s services. The flexibility of a token-based system allows all stakeholders to participate. Tokens represent voting rights and voting rules are defined in Smart contracts.  

The simplest voting system is Token-based quorum voting which requires a certain threshold of voters for a proposal to pass. For example, a 65% quorum requires 65% of the voting power to pass a proposal. If the quorum is met, the proposal passes and is autonomously executed. However, if the proposal receives less than 65% the proposal fails. DAOs using quorum voting include Curve, Compound, and Kleros. Quorum voting has been around a long time and has been tested extensively in coops. It is easy for members to understand and provides a strong form of governance. However, the quorum requirement can make it difficult to pass proposals thus reducing operational efficiency. 

DAO voting systems continue to evolve. Other more sophisticated voting systems include holographic consensus, permissioned relative majority, and conviction (Aresenault 2020). Each of these systems have their advantages and disadvantages.  

To read the full article, visit NSAC Connect.

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