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DAOs (Decentralised Autonomous Organisations) can revolutionize financial services and philanthropy, says a report from the World Economic Forum (WEF).
“DAOs Can Transform Financial Services.” The WEF makes this claim in a report on these organizations published in collaboration with Wharton Blockchain and Digital Asset Project during its annual meeting in Davos. The Economic Forum notes that the community-oriented and code-based nature of DAOs “may enable them to implement new models of capital allocation and coordination, revolutionizing use cases as diverse as financial services and philanthropy.”
The WEF and DAOs
The WEF states that DAOs, generally run on public blockchains, with their actions and governance encoded in open-source software and enforced through Smart Contracts. Like the rest of Web3, DAOs are a novel and emerging phenomenon. The Economic Forum says DAOs are an experiment in re-imagining how we connect, collaborate, and create.
“From finance to social networks to philanthropy, these organizations allow us to re-imagine how we connect, collaborate, and create. However, it also acknowledges that DAOs face significant operational, technical, and governance challenges. Perhaps most acutely, DAOs face a fragmented and uncertain landscape of laws and regulations.”
World Economic Forum
The international organization says that by combining recent technological innovations with community efforts, DAOs have the potential to address many of the shortcomings of the traditional enterprise while achieving more equitable governance and operations. DAOs aim to enable communities to achieve their goals while reducing the need for intermediaries or centralized leadership to manage operations.
Collective decision-making
The WEF refers to DAOs as an emerging part of the blockchain ecosystem. Although german CS professor Werner Dilger first theorized DAOs in 1997, they only recently began to grow, doing so very rapidly across all sectors. The agency specifies that DAOs emerged to help manage resources and serve as a mechanism for collective decision-making. They began proliferating in 2020, coinciding with the Decentralized Finance (DeFi) boom.
In 2021 alone, the value managed by DAOs increased 40-fold, from $380 million to $16 billion. The number of participants also increased 130-fold: from 13,000 to 1.6 million. DAOs have gone from theory to practice in less than a decade, increasing across all sectors, says the WEF.
Smart Contracts
In terms of how they work, you can use your digital assets to reward or incentivize contributors for various purposes. Smart Contracts can execute actions based on pre-existing parameters, streamlining DAO operations. In addition, he says that the open-source nature of public blockchains and Smart Contract logic allows developers to create or modify DAOs quickly.
The WEF refers to its report as a Decentralized Autonomous Organization Toolkit that assists, evaluates, and governs DAOs. “While advocates project the continued rapid expansion of DAOs, critics see them as temporary. Only time will reveal the results of the DAO experiment, demonstrating if, when, and how DAOs will ultimately have their most significant impact.
DAO, Management, and Politics
We represent an organization as a hierarchical structure where top people make most decisions. Decisions go down through the organization. It is top-down decision-making. What representative democracy inserts in some organizations is that these decision-making positions are periodically renewable, with all those with voting rights within the organization being able to participate in the renewal. Even if we consider the latter as users of the organization, their link with the organization’s results is very indirect, limited to acting as judges of those who occupy representative positions and being able to relieve them if the evaluation of their performance is negative.
Of course, in those organizations that do not operate under the model of representative democracy, such as most of those that act directly in the economy, decisions are taken by the organization’s leaders, leaving the users far removed from the process. Current management practices do not prevent the leaders of these organizations from occasionally demanding users’ participation in important decisions. For example, Musk has debated whether he would continue as leader of Twitter. The users have spoken, but in any case, the ultimate decision is up to Elon Musk himself.
Wealth generation
The DAO is a union of people who seek to fulfill the ideal of governing themselves in an organization that also has to generate profits. To this end, participation in collective decision-making links to financial incentives attached to the organization’s performance. Incentives that, in turn, derive from the benefits obtained by the organization. An organization without leaders, who can make good decisions, tends to favor them by concentrating a large part of the profits or, on the contrary, making bad decisions to the detriment of the organization’s members.
As participation in decision-making takes time and effort, an incentive in the form of shares, however small, of ownership of the organization. Say the organization rewards participation with tokens. Such participants will therefore have a strong interest in having those tokens revalued. The change of value is generally achieved by the economic performance and growth of the organization or, in any case, by the financial markets’ interest in those tokens.