Year 1602 revisited: Are DAOs the new corporate paradigm? “The ability to delegate your votes to industry or topic experts will allow owners to exercise a much stronger and clearer voice in the management of these companies.”

In 1602, the Dutch East India Company was formed in what many consider the world’s first initial public offering — allowing perfect strangers to share in stock ownership. Four centuries later, the joint-stock model — especially its incarnation as the modern business “corporation” — sets the pace for much of the economic world.

But, decentralized autonomous organizations, or DAOs, could soon disrupt the joint-stock capitalized business model, much as the Dutch East India supplanted the limited partnerships of its day — or so some may say.

“DAOs are the new limited liability companies (LLCs),” says DAO investor Cooper Turley of these leaderless internet-native entities where key decisions are typically made by consensus. “In five years, companies won’t have equity anymore. They’ll have tokens and they’ll be represented as DAOs,” while high-profile investor Mark Cuban adds, “The future of corporations could be very different as DAOs take on legacy businesses.” Others see DAOs challenging venture capital firms in the race to fund Web3 projects.

“I think DAOs are already replacing traditional corporations,” Sam Miorelli, an attorney who has been active in a number of DAOs including Curve Finance, tells Magazine. “The promise of DAOs is the chance to return closer to the historical norm of project-first where smart people with good ideas can get funding and build a community around a project without first finding a legal budget.” These decentralized autonomous organizations have some unique characteristics. According to law professor Aaron Wright:

“DAOs are not run by boards or managers, but rather aim to be governed by democratic or highly participatory processes or algorithms.”

Indeed, they have been described as operations that “resemble an online chat room with a bank account,” given that “virtually anyone from anywhere with Internet access can join a DAO, participate in its governance and share its profits,” Florence Guillaume, a professor at the University of Neuchatel’s Faculty of Law, tells Magazine.
The DAO of 2016

Things didn’t look so promising back in 2016 when one of the first decentralized autonomous organizations — unhelpfully named “The DAO” — was formed on the Ethereum blockchain network. Several months after its formation, “The DAO” was hacked to the tune of $60 million which led to a bitter split in the still-nascent Ethereum community, culminating in a “hard fork” to restore the stolen funds. “The DAO” cast a pall over decentralized autonomous organizations for some time.

Today, these transparent communitarian organizations still face critical regulatory and legal challenges. Will they need to pay taxes? Can they open bank accounts or sign legal agreements? Can they bring lawsuits against other DAOs?

“There is no ‘Model DAO Act’ the way there is a ‘Model Business Corporation Act,’” wrote attorneys Louis Lehot and Patrick D. Daugherty. They are “fundamentally unprecedented in law.” Key decisions, like deciding how funds will be spent, are often decided by a vote of members/owners who can number in the thousands. Needless to say, decision-making can be cumbersome.

A few things about DAOs: They are typically cooperatives hosted on blockchains like Ethereum (but not Bitcoin) that can handle chunks of software code called smart contracts that automatically execute when certain conditions are met. For example, if an airline flight is delayed by four hours (i.e., the condition), then a payment could be triggered via smart-contract code to the cell phones of passengers who had purchased flight insurance policies.

Most DAOs raise funds from the sale of tokens, which give investors/owners voting rights. Token owners make money if the DAO votes to pay dividends or through token price appreciation, similar to how investors earn profits in publicly listed joint-stock companies like Coca-Cola.

DAOs are just SPACs with extra steps

— Andre Cronje 👻 (@AndreCronjeTech) February 14, 2022

A better business model?

“There is a future for DAOs,” Erik Vermeulen, professor of business and financial law at Tilburg University, tells Magazine, given their transparency, security and open source governance protocols which mean that weaknesses are constantly probed and tested. Moreover, they discourage “rent-seeking,” i.e., manipulating public policy or the economy to increase profits. This is similar to when a company lobbies the government for subsidies. They aim to discourage natural and political monopolies because of their distributed nature, adds Vermeulen.

But, are they really superior to traditional organizational business models? Not all agree. “The current token system does not necessarily prevent monopolies because there are individuals that may own a large amount of the DAO tokens and thus may control voting results,” Sarah Hammer, managing director of The Wharton School’s Stevens Center for Innovation in Finance, tells Magazine, adding:

“All DAOs are d