Customers don’t always behave they way companies expect them to, especially when they take their user behavior to extremes.
Promising unlimited data for your phone will help you sell a lot of phone contracts, but what happens when if you use 64GB of roaming data in Brazil? The answer, I learned, is that you get disconnected.
Decentralized autonomous organizations (DAOs) have the potential to change how organizations and marketplaces work by requiring market participants to take a financial stake in the ecosystem as a whole, and put that asset at risk for bad behavior. When you’re both the customer and the owner, your behavior is likely to be different.
In reality, DAOs are likely to suffer from some of the same principal-agent problems that exist in the traditional world. In theory, customers can buy stock in a company and participate in the benefits that come from making use of their data as well. They can also vote out the management team. In practice, this rarely happens.
And, if we’re not careful, DAOs could end up like this, too. But we’re early enough in the era of DAO development that we have the opportunity to experiment with the technology.
I see three big opportunities with DAOs to avoid simply re-creating the corporate model.
The first involves sustaining much more of an open contributor model with a relatively smaller entrenched management team. Because most DAOs operate as digital organizations built on open-source code, improvements are often based on code and they can be suggested by anyone and voted on widely. The results will also then be visible in the performance of the ecosystem.
The second opportunity comes from implementing privacy in voting while limiting that process to verified stakeholders. Thanks to tools like zero-knowledge proofs, we can now build voting models for DAOs that do not have a risk of becoming a popularity contest. The first DAOs to make use of this technology are being developed now.
Lastly, we can use smart contracts to enable delegated voting rights. This is going to be enormously important because it will allow stakeholders to be efficient in their operations. Most shareholders and fund managers don’t vote on many corporate initiatives because they can’t keep track of them.
I have many of my personal assets in S&P 500 index funds. That’s 500 companies to track, which is impossible even for a full-time financial analyst. Smart contracts could allow me to delegate my voting rights to industry professionals who track particular sectors or topics, like data privacy.
Andreessen Horowitz, a top venture capital firm that has invested heavily in Web 3, recently delegated many voting rights across a range of entities with which it is involved including non-profits, universities, startups that use these ecosystems and other crypto community leaders.
These entities don’t have any obligation to prioritize returns to the venture capitalists, but they are expected to constructively contribute to the success of the ecosystem as a whole. In this model, design points that prioritize the health of the ecosystem as a whole – rather than the returns to a particular group of powerful stakeholders – are likely to be successful.
The simplest business models are the easiest to run, but ecosystems are the future of the technology business. They are also complicated and delicate and, as we keep seeing, large companies, with their focus on shareholder returns above all else, find that balancing act difficult to sustain. Simpler is always easier, but if we’re going to have complexity, perhaps it will work out better as a DAO.
The views reflected in this article are my own and do not necessarily reflect the views of the global EY organization or its member firms.
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