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Why should directors pay attention?It would be easy to write developments like Decentralised Autonomous Organisations (DAOs) off as “digital fringe”. Regulatory developments in Australia suggest otherwise.
Innovations in corporate structures aren’t all that frequent. When they happen it’s worth directors and boards paying attention.
With DAO companies, there are two potential signals:
1. Some shareholders, even in small ventures, may regard board and management structures as inefficient and unnecessary costs. DAOs suggests an alternative with automatic decision rules which could be included in other companies’ and organisations’ constitutions.
2. DAO companies may reflect a lack of shareholder trust and confidence in boards and management to reflect their interests, values and strategic direction. This development could signal that existing legislative and other structures are not delivering the alignment between shareholders, boards and management that shareholders expect, and the shareholders are looking for other ways to achieve it without becoming directors or management.
In December 2021, the Australian Treasurer supported the establishment of a new Decentralised Autonomous Organisation (DAO) company structure in response to recommendations of a Senate Select Inquiry into Australia as a technology and financial centre. Work is now underway to design the necessary regulatory framework.
But what’s a DAO? Will they disrupt governance in New Zealand?
I discovered DAOs in 2019 when I heard some Gen Zers talking about a completely different approach to governance. Their focus was on developers voting via a blockchain to decide what new venture to back and who will do what tasks, but DAOs are much broader than that.
In 2016, ‘The DAO’, an early DAO, raised what was then the largest sum ($150m) ever crowd-funded. It was a VC fund consisting of “smart contracts” on the Ethereum blockchain with no physical address, nor people in formal management or governance roles. The idea was that by removing delegated power from directors and placing it directly in the hands of the members, The DAO would avoid directors (and managers) misdirecting and/or wasting investors’ dollars.
After some initial investments in digital start-ups, The DAO was hacked and was forced to close. The DAO’s Achilles heel was its inability to change its rules, which subsequent DAOs have learnt from. But The DAO’s demise was nothing more than a blip and DAOs have exploded in numbers.
Blockchain and crypto fans argue that blockchain technology, with its properties of trustlessness and immutability, may not just radically transform our financial system but also enable entirely new types of organisations that can run autonomously. Others argue that this is too optimistic and cite The DAO as an example of where human intervention may have saved the day.
Ethereum promotes the flat, democratic structures of DAOs over traditional, hierarchical organisations. Changes are submitted by members for voting on, votes are tallied automatically, and changes implemented automatically. In traditional organisations, if voting is permitted at all it will always be handled manually.
The services offered by DAOs are also both automatic and decentralised, avoiding the traditional human handling or centralised automation, which can be manipulated. Finally, all activity is transparent and public. There is considerable variation between DAOs, with some using councils and other bodies to vet proposals.
In the absence of a hierarchy, DAOs use economic mechanisms, like aspects of game theory, to align the interests of the organisation with the interests of the members. Members aren't tied by contract but by a common goal, and network incentives are tied to transparent, open-source consensus rules. Once launched, a DAO cannot be controlled by a single party. Supporters argue that their transparency and incentives address the principal-agent and information asymmetry problems.
Two famous examples – both promoted by Ethereum - are MakerDAO, which operates the DAI stablecoin (a cryptocurrency), and MolochDAO, which funds various digital projects.
University of Auckland Associate Professor of Commercial Law Alex Sims has been researching and writing on DAOs since 2017. Her view is that it is extremely unlikely that existing companies will transition to a DAO structure, but those creating new organisations will increasingly have to decide between a traditional centralised organisation, such as a company, or a DAO.
Already organisations that would once (and are still) organised as companies are now being set up as DAOs as this podcast illustrates.
Brody Nelson, Auckland serial entrepreneur and company director in the digital sector, told me how DAOs are spreading fast. Some of the biggest hold billions. UNI Swap DAO has over $US4B and a grant's programme for funding projects that will enhance the ecosystem. They have already awarded millions of dollars in grant funding in their first five funding rounds. We are also seeing the beginning of cryptophilanthropy with DAOs such as Big Green DAO distributing funds to food justice organisations. Another phenomenon is the rise ‘self-sovereign’ workers providing governance services to DAOs. Projects are assigned values and different individuals then complete tasks using tools like Gitcoin and paid in cryptocurrency.
Closer to home, Nelson has started a DAO with friends called No Hard Feelings where members nominate and vote on Web3.0 opportunities.
Russell Coutts has also announced that he intends to sell a team to a decentralised autonomous organisation to race in his SailGP series. This team will made up of sailors selected by fans who will also control all decision-making including the appointment of and the tactics of the skipper.
Back to Australia, Sims directed me to a summary DAO Regulation Roundtable (bitsofblocks.io) of some regulatory design principles identified by a Senator-convened group of crypto and blockchain gurus. They include ‘the urgent need for Australia to give DAOs legal status so they can enter into contracts and participants can have certainty about their dealings and treatment, with the possibility of licensing and insurance and property ownership tied to legal personhood’. Others included considering a light touch, defining a flexible definition of legal personhood, and balancing consumer protection with encouraging innovation.
One of particular interest to members of the IoD is 'that the current forms of director duties and fiduciary duties owed to shareholders don't reflect the DAO model (at least on public blockchains) where the lack of transparency in a company is not a feature in DAOs'.
What about the New Zealand response to DAOs? Sims told me that officials are watching the Australian developments very carefully. We should too.
I wrote more extensively about DAOs in The Herald on 17 January, The Economist followed on 26 January What are DAOs, or decentralised autonomous organisations? and Forbes in February DAOs Aren’t A Fad — They’re A Platform
Kevin Jenkins CMInstD is a founder of MartinJenkins and has over 30 years’ experience as an advisor to business, not-for-profits and government. He works with boards and executives to help them clarify their strategic direction and make the best choices to achieve their purpose and goals.
The views expressed in this article do not reflect the position of the IoD unless explicitly stated.
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