A tremendous, albeit early, concept that is successfully implemented in blockchain technology is the DAO, a decentralized autonomous organization. DAOs are entities that utilize smart contracts to provide any number of functions to its users; and often in these systems a native coin used to govern the DAO is minted, and issued to the users of the system. The transactions are encoded on the underlying blockchain, having the effect of eliminating the need for any central governing authority to manage users’ data or transaction history.
The first DAO was launched by several members of the Ethereum community in 2016. The project was simply named the Decentralized Autonomous Organization (or “the DAO”). Now defunct, the DAO was designed to serve as the functional equivalent of a venture capital fund for the cryptocurrency industry. The lack of a centralized authority enabled a system that gave investors in the DAO more access and control over their direct investments.
The platform would allow people to formulate ideas or ventures, and would have the capability to receive funding from the DAO. Those in possession of DAO tokens could vote, giving them rewards if the project was successful. Unfortunately, the platform itself succumbed to a hack of its funds, and while the DAO perished, the underlying ideas behind the DAO continued to prevail.
Tekin Salimi, a general partner at Polychain Capital, and professional investor in the cryptocurrency industry first predicted in a 2017 piece written for CoinDesk, that DAOs would continue to proliferate and disrupt many functions of traditional firms. DAOs do this by blurring the line between a firm’s shareholders, management, creditors, and customers. This creates a model of incentive alignment never before accomplished in business organizations (which traditionally suffer from the principal-agent problem).
On the topic of DAOs, Salimi said, “Gas prices and scalability concerns on Ethereum today are bottlenecks that have led many project founders to consider launching DAOs on other platforms. Polkadot is a great example of a platform that stands to win DAO market share. Through utilizing Parity’s Substrate framework, a project founder can now launch a DAO chain that is natively interoperable with all other Substrate-based blockchains. This DAO chain can also participate in Polkadot’s parachain auctions to become an elected parachain and effectively piggy-back off of Polkadot’s consensus security. The value prop of a platform like Polkadot is through reducing the surface area of issues that a DAO founder needs to worry about, so the founder can focus fundamentally on building a valuable economic model for the DAO’s tokenholders.”
Polkadot is a blockchain platform invented by Dr. Gavin Wood (formerly of Ethereum). The core vision of Polkadot is to connect private and consortium chains, public and permissionless networks, oracles, and future technologies that have not been created yet in a single, cohesive, and interoperable system. Polkadot makes it possible for different independent blockchains to seamlessly swap data and transactions, in a trustless way, through “parachains”, with each individual parachain utilizing the security of the Polkadot relay chain.
Beyond Polkadot, DAOs will continue to grow in number, as well as types of use cases. While the original DAO was modelled as a venture investment fund, future DAOs may expand into use cases such as governance and ownership over financial products, peer-to-peer marketplaces, and even more traditional businesses (eg a DAO that hires and pays software developers to write code). This is a segment within the crypto space that will continue to evolve this year and onwards.