If you are just coming into the blockchain space, you may have stumbled across the terms DAO (Decentralized Autonomous Organization) and/or Continuous Organization. Both concepts may seem quite complex at a first glance, so in this article, we’ll try to go through both with some real-life use cases and as fewer technicalities as possible.
Taking a step back, let’s start with the fact that blockchain, cryptocurrencies, and crypto-economics were inspired by the inefficiencies in the traditional financial system, particularly the lack of trust, centralization and the high transaction costs that come with it. On the other hand, blockchain technology is heavily based on decentralization and transparency, in an effort to “bring the power back to the people”. Speaking of inefficiencies and centralization, it was just a matter of time that some really smart guys started to address corporate governance issues through blockchain. DAOs and Continuous organizations are efforts to decentralize corporate governance based on crypto-economics.
Decentralized Autonomous Organization (DAO)
DAO in blockchain is a concept that aims to decentralize and automate (as much as it’s possible) corporate governance through smart contracts and tokenization. Smart contracts enable enforcement of rules and decisions, while token-holders are the ultimate decision-makers, with their voting power proportional to the number of tokens they have. In contrast to a traditional company/organization, a decentralized autonomous organization is a flat organization with little to no management structure in place. Essentially, it’s an attempt to create a digital democracy within an organization.
The first (rather unsuccessful) attempt at a DAO was “The DAO” back in 2016, which aimed to democratize venture capital investing, by allowing token-holders to vote on which projects were funded. Since then, some of the more successful decentralized autonomous organization creations are MakerDAO (a decentralized central bank), MolochDAO and MetaCartel, with the latter two being communities coming together to fund various blockchain-related development projects.
fun fact: LimeChain is one of the original MetaCartel members.
Decentralization and democracy in corporate governance and finance sounds great. But what are the shortcomings of a Decentralized Autonomous Organization?
Apart from being an emerging and relatively uncharted concept, the biggest shortcoming of a DAO is arguably scalability and longevity in the context of growth. Let’s take the example of a decentralized autonomous organization built around the idea of funding various development projects. It starts off with a given token supply, representing the voting rights of founding members, and new tokens are created for new members coming in. With the addition of each new member of the DAO, the voting power of existing members gets diluted. What’s more, as token supply is constantly increasing, new members investing in the DAO will be getting less and less voting rights. Long story short, there’s progressively less incentive for new members to be joining the DAO which leads to an eventual capital drain.
To wrap DAOs up, let’s take a look at the pros and cons:
Decentralized Organizations Pros:
- Little to no management structure in place
- Digital democracy
- Great for communities/NGO’s/small cooperatives
Decentralized Organizations Cons:
- Hard to scale and avoid capital drain (MakerDAO is a wonderful exception)
- Still, a crypto-economic experiment, best practices in governance & operations are to be invented
The continuous organization, on the other hand, aims to bring sustainable (continuous) financing to the legacy organizational structure, all enabled by some pretty complex crypto-economics. A continuous organization usually has a traditional management structure in place, combined with a Decentralized Autonomous Trust (DAT) which manages the organization’s finances and aligns stakeholder incentives.
Wait, what is a Decentralized Autonomous Trust?
The DAT is a smart contract built to incentivize long-term stakeholder participation and discourage speculation. The smart contract is based on a complex mathematical model called bonding curves that regulate buy/sell token prices and distribute dividends.
When investors decide to buy Continuous Organization security tokens (let’s call them CO tokens), new tokens are minted and the bigger chunk of the investment is allocated to the organization’s core activities, while a small chunk is set aside in a reserve. Each new investment into the CO causes the token price to go up. On the other hand, when investors decide to sell their CO tokens, they get refunded by the CO reserve (usually at a lower price), while their tokens are burnt, causing the CO token price to go down. The bonding curve sets a buy-sell price correlation that aims to discourage short-term speculation.
When the Continuous Organization generates revenues through its core activities (whatever those are), part of it is used to mint new tokens (increasing both the token price and the reserve), while the rest is sent back to the organization. Investors receive newly minted CO tokens as dividends. The Continuous Organization model encourages investors to be in it for the long run to either 1) receive dividends 2) sell their tokens on a secondary market at a higher price.
Confused? Let’s have a look at a real-life example:
Mogul, aiming to democratize the movie industry, is one of the handfuls of continuous organizations out there. At LimeChain, as the development partner for the project, we used a complex bonding curves model to align incentives. Investors in Mogul are able to vote on movies to be funded (and therefore produced), the dividends from which are then proportionally distributed to investors through a smart contract. Essentially, implementing a continuous organization model through bonding curves enables a blockchain-native company like Mogul to detach itself from speculation, onboard long-term investors and achieve a sustainable financing model, instead of fundraising every 12-18 months.
Let’s take a look at the pros and cons of Continuous Organizations:
- A sustainable financing model for organizations
- Attracting long-term investors, rather than speculators
- Extremely difficult to develop an accurate bonding curves model
- Regulation is still unclear in some jurisdictions, as we’re dealing with security tokens
Going forward, it’s safe to say that both concepts will continue to evolve as we’re still experimenting with the capabilities of blockchain and distributed ledger technologies. One thing is clear however, there’s an obvious shift towards decentralization and empowerment driven by the technology.
For questions and inquiries about blockchain, don’t hesitate to get in touch via limechain.tech