DAOs could revolutionize how startups are run

The crypto sector has had a profoundly disruptive impact on just about every industry over the past few years. Now, the sector is turning the fundamentals of running an organization on its head by codifying how they’re governed in the blockchain. 

Decentralized Autonomous Organizations (DAO) are owned and run by their members, who can vote on operational decisions via a blockchain-based governance token. Unlike traditional companies, DAOs give just about anyone the opportunity to contribute to a shared project with other like-minded individuals and have a say in the project’s direction.

It’s this user-first and community-owned approach that underpins the ideals of Web3. But not everyone is convinced — especially when it comes to who’s funding these novel enterprises. 

The debate over venture capital funding of Web3 is a highly nuanced one. While it can be a viable step for startups to scale swiftly by leveraging the funds, operational support, and networking opportunities that VCs provide, this comes with its own set of caveats. One drawback, in particular, can be a significant pain point for founding teams — how do startups ensure that the business remains cognizant of all relevant perspectives when VCs hold the controlling share?

This debate was recently revived by Twitter founder — and former CEO — Jack Dorsey, who took aim at the venture capital sector’s supposed overreach into Web3. 

While Dorsey’s position that Web3 is simply a plaything for VCs is somewhat hyperbolic — the point still stands. Centralization of Web3 projects (be it corporate control or centralized infrastructure) spells trouble for transparency and, more importantly, decentralization. 

The argument for decentralized decision-making 

Blockchain technology has ushered in the creation of businesses that allow users greater control over the services they choose to use. These emerging services turn the top-down approach of traditional tech firms on its head, allowing patrons to have a say in the development of a new generation of Web3-based games, apps, and companies.

VCs currently have a monopoly on decision-making in their chosen investments, giving them the power to dictate critical judgments and the direction of these companies. While this sounds fair in theory — given the money they provide — this can also mean that critical decisions get slowed, or the original vision for the company diverges entirely. 

However, under the Web3 model, it makes sense that key business decisions should be as decentralized as the infrastructure that underpins them. Decentralized voting via a token governance structure means that anyone — regardless of their ethnicity, creed or financial status — can get involved and benefit from being part of a like-minded community of peers, removed from the hierarchical structure of the standard business model. 

By adopting this new model, and repudiating the central gatekeepers of Web 2, a new form of business can emerge that’s no longer driven by a centralized entity. Moreover, this also stands to level the playing field with entrenched big tech companies by offering tangible incentives for platform usage and genuine governance over their chosen services. 

Reimagining democracy

ConstitutionDAO is a true underdog story that demonstrates this process perfectly, highlighting what it truly means to be part of a decentralized organization. Launched in November 2021 by a group of crypto enthusiasts, ConstitutionDAO, as its name suggests, was a bid by a DAO to buy the first printed version of the US Constitution. 

ConstitutionDAO raised nearly 11,000 ETH (just over $45 million at the time), more than double the estimated purchase price of $20 million. While the intense bidding war ended in a loss for ConstitutionDAO, the group made history by showing that a collective of like-minded individuals could come together and take on larger entities, fully governed by the protocol that allows every member to have a say in key decisions. 

The Aave Protocol is another such DAO, using its funds to build its community and nurture budding innovators and their projects. Aave allows its members to view the proposals that prospects submit and vote for or against funding their development. 

Aiming to galvanize this community-first approach to business building, the Internet Computer, a public blockchain that hosts smart contracts that run at web speed, is preparing to roll out a 1-click DAO governance and decentralized fundraising rails for Web3 dapps. This will allow individual services building on the blockchain to turn themselves into DAOs and permit voting controls on demand. 

When a DAO is assigned to a dapp, it provides the community with full control over future configurations and upgrades, and enables a decentralized fundraiser to be run, with funds being held by the DAO directly. 

As a result, startups can compete with incumbent services on a level playing field by building a strong user base by incentivizing contributors and driving network effects to grow their reach. DAO members are also empowered to voice how they believe their treasuries should be allocated.

The unique structure and values of DAO complement that of startups, making them a viable option for companies that lack the resources to scale.

VC control of Web 3 is only half the battle

Beyond rejecting the tired business models of big tech, the true centralization threat is the fact that Web3, in its current format, is more like Web2.5. Many “decentralized” projects masquerade as Web3 services when, in reality, they heavily rely on cloud providers such as Amazon Web Services to serve their frontends — this, unfortunately, includes Ethereum. The internet computer is the only blockchain capable of serving web content directly to end-users without employing third-party cloud servers.

While we may be far from accepting and using this tech en masse, it’s hard to ignore the implications that a working DAO has on larger institutional investors. Utilizing decentralized networks like the Internet Computer to form the foundation of a DAO allows individuals to access opportunities previously reserved for VCs and family offices and incentivizes members to work alongside each other to reach their common goal.

Josh Drake is the COO at DFINITY Foundation.