The Royal Melbourne Institute of Technology (RMIT) Blockchain Innovation Hub, a leading research institute that studies blockchain technology and its applications, has published a paper exploring the innovative governance structures of Decentralised Autonomous Organisations (DAOs). The authors offer a fresh perspective on the capabilities of DAOs. Calling DAOs “adaptive governance engines”, the paper says their true benefits are enabling low cost and fast change in governance structure in order to adapt to dynamic regulatory, competitive and financial environments.
What are DAOs?
The paper states that:,
a DAO is an organization whose essential operations are automated, agreeing to rules and principles assigned in code without human involvement. A DAO is a novel, scalable, self-organizing coordination on the blockchain, controlled by smart contracts.
In the fast-evolving world of blockchain and decentralised technologies, DAOs are emerging as a revolutionary model of governance.
Why DAOs Matter
The paper explains that traditional economic theories, particularly Ronald Coase’s theory of the firm, argue that firms exist to reduce the transaction costs associated with market activities. Firms, as Coase explained, take over certain functions – like production and coordination – because they can do so more efficiently than relying purely on market mechanisms. DAOs, on the surface, seem to extend this logic by using blockchain technology to automate contracts and reduce costs further.
However, the authors argue that DAOs are much more than just cost-saving mechanisms that distribute and minimise agency costs through token governed smart contracts. The true value of DAOs lies in their ability to enable rapid, low-cost governance changes. In today’s complex and rapidly shifting economic, regulatory and technological landscapes, organisations need to be adaptable. DAOs offer a flexible governance model that allows organisations to evolve and respond to these external changes more quickly than traditional firms.
This adaptability is key to their value. Traditional organisations often struggle to change their governance structures quickly, but DAOs make it possible to adjust governance in real-time through smart contracts and community voting mechanisms.
Case Studies
The paper considers three DAO case studies – Shapeshift, Uniswap and Optimism – to illustrate how DAOs can evolve and adapt to external pressures.
Shapeshift, a cryptocurrency exchange, started as a centralised company but transitioned to a DAO in response to increasing regulatory pressures. This shift allowed Shapeshift to decentralise control, creating a wider community of stakeholders and seek to mitigate regulatory risks.
Uniswap, a decentralised trading protocol, provides a different example. While initially centralised, it gradually transitioned to a DAO by introducing governance tokens. Although developers continue to lead protocol development, governance decisions, like protocol upgrades and treasury management, are ultimately decided by token-holders through voting. This gradual shift of control demonstrates the frameworks’ ability to empower token-holders while the protocol continues to benefit from developer expertise.
Optimism, a Layer 2 blockchain network, also transitioned from a centralised structure to a DAO. Optimism has embraced an experimental approach to governance, iterating on its structures and adapting based on feedback from its community. This iterative model showcases the potential of DAOs to experiment with new forms of governance and adapt to changing needs over time.
Conclusion
The paper provides a forward-thinking analysis of the potential for DAOs to redefine governance in the digital age. By positioning DAOs as adaptable and innovative governance tools, it opens the door for further exploration into how decentralised models can meet the needs of modern organisations in the digital economy.
Written by S Pettigrove, J Huang and M Norton
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