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How DAOS Are Changing Leadership Decentralized autonomous organizations, or DAOs, are quickly gaining popularity.

By Anastasia Chernikova Edited by Chelsea Brown

Opinions expressed by Entrepreneur contributors are their own.

While DAOs are most often associated with cryptocurrency, they can be implemented across a wide range of industries. For example, one group, ConstitutionDAO, raised over $49 million to buy an original copy of the U.S. Constitution. Another group, Friends With Benefits (FWB), uses its funds to launch projects like NFT galleries and other real-world benefits.

Before discussing how DAOs are changing the face of leadership, it's essential to understand what they are and how they work.

Related: This Crypto-Fueled Internet Collective Raised More Than $40 Million to Buy a Rare Copy of the Constitution

What is a DAO?

Decentralized autonomous organizations, or DAOs, are member-owned organizations with no hierarchical leader. Instead, founding members of the group agree on rules and contracts encoded into blockchain technology via smart contracts. These smart contracts cannot be changed easily, and because they're part of the blockchain, everything is publicly recorded.

But what is blockchain? In essence, it's a decentralized digital ledger that documents cryptocurrency transactions. All DAO frameworks are built around it.

A simple way to think about DAOs is a secure online bank account with several account owners. Every member pools their resources via a single cryptocurrency wallet controlled by the group. The contracts encoded into the blockchain ensure that everyone's capital is secure and every change is clearly recorded for all to see.

The basic flow of DAO governance is:

  • A member proposes an initiative.

  • All members vote with governance tokens.

  • If the initiative is passed, it's added to the smart contract.

  • Members begin working toward completing the initiative.

Related: Nimbus CEO Alex Lemberg On The Power Of Blockchain To Create A Society In Which Everyone Is Empowered

The advantages of DAOs versus traditional organizations

1. No power hierarchy

In a traditional organization, there is always some kind of hierarchy. In general, a board of directors, executives and upper management form the basic structure of power. Any proposed changes are entirely in the hands of this upper echelon.

DAOs seek to deconstruct this traditional model by flattening the hierarchy. These organizations rely on the security and transparency of the blockchain to distribute power equally among all members. Smart contracts encoded into the blockchain cannot be altered without the consent of the majority, and every change is publicly documented to ensure total compliance.

2. Equal ownership and a sense of community

In most traditional organizations, it's nearly impossible to break into the upper echelon of power once it's established. It's common for the same executives and directors to remain in power for decades with no chance for lower-tier members to meaningfully contribute to the company's direction.

With DAOs, control of the organization's assets and direction is given to each participant based on their project contribution. This means that every person who contributed capital has an equal voice in the organization's governance. In turn, this fosters a sense of community and cooperation that helps the company achieve its objectives faster.

3. Total transparency

Transparency is a major issue that traditional organizations struggle with. Even the companies with good intentions have to carefully curate their brand image, which often means leaving out certain information. Additionally, businesses that offer some level of transparency often do not disclose things like financial health and expenditures to employees or the public.

In DAOs, transparency is built directly into the foundation of the organization. Blockchain technology is specifically designed to be an unalterable public record of all transactions. This means that people can invest in DAOs with the confidence that their capital is being used judiciously.

Related: How to Harness the Power of Blockchain Technology to Prime Your Business for the Future

How lessons from DAOs can make leaders more effective

1. Leadership is earned

Traditionally, top-down leadership comes to those who either already have power or the ability to purchase it. Since everyone has equal shares in a DAO, authority is not "given" to anyone. Instead, it's earned by the merits of the proposals made.

This creates an organization that follows the guidance of someone people are voluntarily following. This always yields better results, whether through growth, innovation or higher profits. This style of leadership is something all good leaders can practice. Even if they didn't "earn" their role in the same way, they can earn the trust and loyalty of their team through their actions.

2. There is more flexibility

Modern corporations are like enormous ships that require huge amounts of time and effort to change course. There is endless red tape and bureaucracy to navigate before any real change can be implemented.

Because DAOs are more democratic, changes can be proposed and implemented with relatively little hassle. While DAOs are primarily based on the division of funds, leaders can still note how the process works and see how efficient it is. The level of efficiency DAOs create is something that great leaders can seek to replicate in their own organizations.

3. Participants can collectively shape the future of the venture

This idea is similar to how stocks work in publicly traded companies, but it's not a one-to-one comparison. DAO members purchase governance tokens that are used to cast votes on proposals. Once the vote is cast, these tokens are used up, and votes are made public record.

In this way, members are forced to vote thoughtfully and in a way that is best for the organization's overall direction. Everyone has "skin in the game," so to speak, and it incentivizes participants to build a better future.

DAOs Might Be the New LLCs

Many experts say they won't be surprised if DAOs replace the traditional LLC business model. While the concept still has plenty of kinks to work out, the current DAOs are showing businesses a better, brighter future. The leadership model of DAOs is vastly different from how traditional organizations are led. However, this difference in power structures is something that good leaders can learn from to become great.

Anastasia Chernikova is a NYC-based entrepreneur and journalist working with the world’s top tech companies. Chernikova is the editor-in-chief of The Vivid Minds.

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