One of the promises of the new Web3 movement is that it can open up to traditional firm construction using distributed autonomous organizations (or DAOs). The idea of ’disruption’ has been circulating in the tech world for some time now. We’ve mostly seen what some observers call the “uberization” of the firm, while others use the catch-all phrase ‘disruption’ to sound wise.
Until now, before the advent of Web3 DAOs as giant killers, we only had the formation of online ‘marketplaces’ that allowed buyers and sellers to trade a certain commodity or service while being firmly engaged in today’s Web 2.0 world. lets you. These marketplaces have led to additional purchases in the provision of micro, grassroots transport services – particularly in areas such as ride share aggregators (Ola, Uber) and markets such as intra-city logistics (Porter.in). These marketplaces are great technological breakthroughs in themselves without the use of any Web3 techniques or strategies. They have also, arguably, been highly successful business models. But these are still traditional firms in every sense of the word ‘disruptive’. They have daily dealings with shareholders, a board of directors, executive management, at least some employees (and quasi-staff who have largely fallen out of action), as well as many regulators, stakeholders, and others.
A traditional firm is a nexus of contracts. In simple words, a regular company is a junction point where various contracts come together. These include contracts for the purchase of raw materials from suppliers, as well as agreements with various other entities or people that help the firm manufacture its product or service it. These may be contracts of employment, or with accountants, lawyers and technology firms, or for the purchase of equipment used on the floor of a manufacturing shop, as well as furniture, fixtures, etc. Then, of course, the product or service also has sales contracts with customers.
Ronald Coase, an economist who won the Nobel Prize for giving the world a paper titled ‘The Nature of the Firm’, said that the only reason for the existence of firms (or companies) was forcing external economic conditions. Entrepreneurs or owners employ and organize people to produce goods and services that can be traded in a more cost-effective manner than in the free market. The prevailing economic conditions then meant that the total cost of thousands of buyers doing business with thousands of sellers to produce and purchase a single motor car was simply too high; The transaction cost alone will probably outweigh the input and other costs of building the car.
Therefore, instead of forming thousands of independent relationships to produce and purchase cars, carmakers such as Soichiro Honda and Takeo Fujisawa created the Honda Motor Company, with which thousands of buyers and sellers would do business, thus making Honda an ‘alliance’. contracts.’
DAOs as envisioned by Web3 aficionados are a different beast. Web3 runs on blockchain technology, which allows for peer-to-peer contracts without intermediaries, or indeed, any need for ‘combinations of contracts’. Its expansion means that it is possible to establish distributed autonomous organizations that operate entirely on trust. As interest in the possibilities of this space has grown, the DAO has begun to experiment with the limits of what is possible. There are DAOs for investing, for building new products, for socializing, and for multiple iterations for each of these.
The DAO aims to act like a company in the blockchain world, controlled directly by its stakeholders, with no governance structure such as a board and executive management. DAOs have many of the same requirements as modern firms today, but must deal with more complexities given their ‘virtual’ form of organization, liquidity and technology stack. The DAO is organized in a flat structure led by a group of key contributors. To make decisions, members submit proposals and vote on them using DAO “tokens” in full public view. Unlike a corporation, where an employee is required to be screened and interviewed before being hired and then promoted through the company’s management, which controls the firm, some DAOs allow anyone to join. Others require a minimum number of tokens (often cryptocurrency).
At this stage, DAOs are early in their development, and require software tools for DAO formation, communication, collaboration, payments, etc. The DAO only has a small number of providers to choose from in these categories. Their choice is limited. We can expect newcomers in this field in the coming years.
Unsurprisingly, The DAO has already been abused, most famously in the shutdown of an entire cryptocurrency bank called Beanstalk. Two months ago, as a result of a DAO vote, the entire assets of the bank were transferred from it at once. An attacker had borrowed $80 million in cryptocurrency and deposited it into the DAO’s ‘token’ account, giving him enough voting rights to immediately pass any resolution to the bank. With that power, the attacker voted to transfer the contents of the treasury to him/herself, then returned voting rights in the process of withdrawing the funds, and subsequently repaying the loan – all in a matter of seconds.
Be it technology or any other field where there are new opportunities, there are robber barons too.
Siddharth Pai is the co-founder of Sienna Capital and the author of Takeproof Me.