Understanding DAOs and How They Solve the Principal-agent Dilemma
A blockchain is a series of several computers connected through a peer-to-peer network, and the blockchain holds the records for all crypto transactions. It can be deemed as a common ledger that facilitates the recording of digital transactions.
A DAO or Decentralised autonomous organisation is a kind of organisation that operates on blockchain technology autonomously while compiling the basic code and algorithms.
These DAOs can run as they are based on such algorithms, and this potentially eliminates any human involvement, reducing human errors.
Understanding DAOs requires some pre-requisite knowledge about blockchain and algorithms. However, one can grasp the basic context of DAO.
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1. What Is a DAO?
It is an organisation that takes advantage of blockchain and algorithms to function and overcome the principal-agent dilemma that traditional organisations face.
2. What Is the Principal-agent Dilemma?
A principal-agent dilemma is a relationship between two categories of stakeholders. The agent is an entity that has the authority to execute decisions on behalf of another entity. In comparison, a principal is a representing agent who executes the decision on behalf of the principal.
Usually, there is high friction between the principal and agents, and both parties might have different goals or priorities. Such friction and lack of transparency can lead to inefficiency within the organisation.
3. DAOs and Principal-agent Dilemma
The hierarchy of power and decision-making within an organisation is often centralised. The top-most leaders make the decisions, and people at the lower hierarchy levels have to abide by them.
A DAO aims to minimise human error and achieve it by virtually eliminating the need for human intervention.
It reduces the organisation's governance, which helps in reducing friction amongst stakeholders.
A DAO is based on smart contracts and algorithms that align the stakeholders' interests with the organisation's governance structure and information flow.
It creates a solid autonomous organisation that is enforced by code and wherein the stakeholders or third parties can not hamper the set processes. The autonomous organisation operates as per the instructions given in the smart contract; these instructions are executed when the set conditions are met.
Understanding DAOs and implementing them helps decentralise the decision-making process and make it more transparent, removing the bureaucracy in the decision-making process.
Use-case of DAO
DAOs are used to make charities, exchange NFTs, crypto, fundraising, and conduct other related activities without the need of an organisation's hierarchy or intermediaries.
Bitcoin is the world’s first DAO as it is equipped with coded rules and functions without any human intervention through secure contracts and consensual protocols.
Meta verse is changing the DAOs as now people envision a DAO as an organisation that like-minded individuals own and everybody has their say in the organisation. According to analysts and business insiders, if the adoption of DAO continues to grow, they could soon replace traditional companies.
Some companies are based on DAO.
● Maker Dao- It is a decentralised finance platform that operates decentrally to provide lending services.
● Uniswap – It is an exchange platform built on the Uniswap protocol and works on the Ethereum blockchain.
While DAO is mainly used for crypto and metaverse companies, many traditional companies will soon take advantage of the decentralised decision-making process based on smart contracts and protocols.