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Revolutionary and revolutionizing. These words are often thrown around. Rarely are they applied to anything genuinely new and even less often to anything capable of bringing truly radical change. In the case of the ‘DAO’ though, these descriptions are apt.
DAOs (decentralized autonomous organizations) are a truly new innovationone that might be the key to unlocking the potential of Web 3.0. In corporate finance, the revolution has already begun.
Here, DAOs serve as communities that can be formed around a central idea that each member thinks is worthy of investment. Making it possible, the DAOs blockchain and smart contract infrastructure.
Once the specific rules and relationships have been determined and encoded, the DAO autonomously runs in a streamlined fashion, governing transfers of value, keeping track of contributions and apportioning governance rights.
DAOs solve a number of problems in corporate finance in ways never seen before, shifting what was once bureaucratic and centralized into the algorithmic and digital.
Benefits of DAOs for corporate finance
Backing the right startup can bring huge returns on an investmentsometimes a hundredfold. Think Facebook, Google, PayPal, and Uber.
It is the venture fund that has specialized in injecting the capital that transforms the unprofitable, nascent good idea into a high-growth juggernaut.
The traditional venture capital (VC) approach has benefits, bringing large investments, expertise and access to networks. But there are some significant disadvantages, such as slow decision-making, demands for control and high expectations and valuations.
The traditional approach also does not serve small projects which must then rely on bigger firmsthe VC funds to prosper.
This reliance on only a few large ‘gatekeeper’ VC entities is inefficient, resulting in many good ideas falling through the net or fighting through the red tape that comes with dealing with big companies. As a result, good ideas go to waste, and both budding startups and potential end users lose out.
DAOs offer an alternative that addresses these issues, leveraging blockchain technology to access funds from multiple sources. This includes the capacity to crowdfund retail investors with minimal amounts.
One of the best examples of this sort of DAO fundraising happened in November 2021. In a five-day period, Constitution DAO raised close to $47 million to buy a rare copy of the US Constitution that was being auctioned by Sotheby’s though they were ultimately outbid by a billionaire.
DAOs enable operational efficiencies, such as faster decision-making and increased investor flexibility. DAOs also reduce costs, and thanks to both their transparency and governance capabilities, they can establish unsurpassed levels of trust for investors.
DAOs also enable members of a communitythose who might see the potential in a project to provide the required liquidity and to receive in return a share of the spoils.
This capacity democratizes and spreads power to more people. Decentralized capital means great ideas are no longer dependent on the wealthy but can be chosen by the wider community.
Access to capital
In 2018, around 10 DAOs had been formed. By 2020, there were nearly 200, according to Forbes. In 2021, DAO treasury holdings expanded forty-fold.
At the time of writing, the total number of DAOs in existence tops 10,000, and the total treasury of all publicly accessible DAOs stands at $12.3 billion up 25% on the year.
Thanks to the DAO, the venture capital model is also being disrupted, and it may one day be displaced entirely.
The DAO as VC offers an autonomous ecosystem that provides retail investors access to the crypto space, with minimal investments potentially of just $1.
Significantly, for one quarter of 2022, of all VC investment in projects in the crypto space, investment from DAOs comprised nine percent.
By utilizing smart contracts on the blockchain, DAOs can securely and efficiently access funds from multiple sources, including traditional VCs, angel investors, private investors and customers.
Together, they form a collective of contributors, each receiving tokens according to stake.
The DAO VC model is transforming how venture capital funds are structured. In short, blockchain has opened up unprecedented opportunities for all types of investors to access and manage their funds in a secure and efficient manner.
Blockchain technology is revolutionizing the way that resources are managed and allocated, with DAOs leading the way.
With DAOs, resources like NFTs (non-fungible tokens), protocols, money, on-chain projectsnd soon real estate traditional companies and businesses can be securely and transparently managed in a decentralized manner.
Not only does this ensure that resources are fairly allocated among stakeholders, but also it provides a mechanism for rapid dispute resolution.
By leveraging blockchain technology, DAOs offer an unprecedented level of control over resource managementwhether traditional assets or digital ones.
People are managing their NFTs and tokens and making decisions about collective investments, both on-chain and off-chain. DAOs might also invest in such areas as, say, real estate or gold mines. Some jurisdictions are more friendly than others and allow DAOs to build for-profit companies on blockchain.
Building trust with investors
Crowdfunding platforms are not new. But until the DAO, there existed no real infrastructure to support an ongoing relationship between a project and its funders. Transparency, incentives and governance are three key elements for any successful DAO.
To ensure that these components remain intact, DAOs must be transparent about their operations and how decisions are made.
This can be done through the use of open-source software, smart contracts and other technologies that allow stakeholders to review and verify the code underlying a DAO’s operations.
Strong governance is essential and should include measures such as providing clear decision-making processes, identifying dispute resolution mechanisms and establishing operational protocols for managing funds or resources. By combining these three core elements, DAOs maximize their chances of success.
Having a DAO is more cost-efficient than traditional companies because it does not require the same overhead costs associated with traditional companies. For example, a DAO does not require a board of directors or other traditional management structures.
Additionally, it does not require the same legal and regulatory costs that traditional companies must pay. Also, as DAOs are powered by blockchain technology, they are more secure and reliable than traditional companies.
As a result, they can help to reduce costs associated with corporate governance, making them an attractive option for businesses.
Financial and non-financial benefits
Adopting a DAO model for business can offer a unique blend of benefits. Financially, DAOs can help businesses save on costs associated with traditional governance models by eliminating the need for owners or trustees.
This could result in lower operational expenses as well as fewer liabilities due to its distributed nature. Additionally, DAOs are generally more transparent than traditional models, offering greater visibility into decisions and resources.
From a non-financial standpoint, DAOs provide an opportunity to democratize decision-making. All members of the organization have equal access to information and voting power, resulting in greater engagement from employees and customers alike who feel their opinions and perspectives are taken into consideration when decisions are made.
Ultimately, adopting a DAO model for business can lead to reduced operational costs, increased transparency and improved employee satisfaction.
Challenges of implementing DAOs
DAOs have the potential to revolutionize the way in which governance systems are structured. However, there are a number of significant challenges, applicable to any blockchain, that must be addressed before wider adoption.
One of the major challenges is scalability. As DAOs rely on distributed networks, they need to be able to handle large amounts of data and transactions. This requires an efficient consensus mechanism and robust protocols to ensure the integrity of transactions.
Another challenge is security. The open-source nature of DAOs means they are vulnerable to attacks from malicious actors who could potentially gain control of the network.
It is therefore essential that robust security measures are implemented to protect against such attacks.
There is also the issue of trust. For a DAO to work effectively, participants must trust in its processes and decisions, as well as the technology behind it.
This requires a certain level of transparency and accountability for all participants, which may prove difficult in some contexts.
Finally, the regulatory landscape for DAOs is still developing, and it may take some time for regulators to establish clear guidelines for the industry.
The advent of the DAO is beginning to change the face of corporate finance. DAOs enable the accessing of funds from multiple sources as never before while deftly managing resources and building potentially unparalleled trust.
Additionally, with the benefits of faster decision-making, increased investor flexibility and improved governance, DAOs provide solutions and capabilities like no other structure.
As the technology continues to evolve, and more projects adopt the DAO model, it’s likely that we will see continued growth and innovation in the area, accelerating further adoption.
Vlad Shavlidze is the CEO of XDAO.app, a multichain DAO builder for jointly managing crypto assets and DeFi projects.
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