DAOs captured the zeitgeist in 2021 with ConstitutionDAO becoming the largest crowdfunding campaign in history. Despite being promising, DAOs are only one type of onchain organisation. They aren’t well suited for contractual organisations.

DAO: blockchain based entity owned & managed by its community. INC: for-profit organisation that is created, operated and governed onchain.

Advantages of DAOs

DAOs are the most exciting development in corporate governance in the last 50 years. They are a natural evolution for internet communities:

• they align stakeholder incentives through token-gating

• they are simple and cheap to set up and can operate across borders seamlessly

• they give community members decision-making power through onchain governance

Shortcomings of DAOs

The shortcomings of DAOs are well documented:

• they are inefficient

• they lack centralised impetus

• they aren’t well suited for complex environments

• they suffer from the DAO dilema — the more a DAO is decentralised, the more it is unorganised. As a DAO scales, this problem worsens.

Types of organisations suited for DAOs

DAOs have found product-market fit as a tool to escape regulatory pressure (MakerDAO), as financial flashmobs (VitaDAO, UkraineDAO, ConstitutionDAO) and as a safeguard for public goods (Ethereum is effectively a DAO). Decentralised governance leads to the ossification of protocols.

Vitalik argues that decentralised governance is paramount under certain circumstances:

1. for censorship resistance organisations,

2. for decision making in concave environments,

3. for organisations that require credible fairness.

He admits that DAOs are not well suited for contractual organisation and convex environments where opinionated decision making is necessary (rather than consensus seeking). Companies/startups fulfill both of these criterion — they need to be radical to thrive. A new format is needed to upload business to web3.

“By far the greatest number of organizations, even in a crypto world, are going to be "contractual" second-order organizations that ultimately lean on these first-order giants for support, and for these organizations, much simpler and leader-driven forms of governance emphasizing agility are often going to make sense.” Vitalik

Experiments run by DAOs that are interesting for INCs

To limit the inefficiencies linked to direct democracy (one token one vote), DAOs have experimented with novel governance systems:

• Delegated democracy: token holders delegate their votes to representatives (just like citizens do to members of parlement). ENS has delegates and Compound enables token-holders to delegate their votes to ideas.

• Pods: DAOs start onchain sub-DAOs (pods) with a limited number of high context individuals that can take unilateral decision. DAOs trust the pod-members with agency and decision making ability while keeping the right to revoke members. UkraineDAO uses this format developed by Metropolis.

• Optimistic governance: the DAO core contributors submit proposals that are automatically accepted after a certain delay. During the approval pending period, token-holders can vote to veto the proposal. If a certain threshold of veto votes is met, the proposal has to go through a DAO formal voting process. Like optimistic rollups, optimistic governance assumes trust but has a right to revoke it. TribeDAO uses optimistic governance to increase speed of decision-making on engineering questions.

Differences between DAOs & INCs

DAOs are a tool for activism, INCs are a tool for conspiracy.

INCs are more efficient, agile and decisive than consensus-based DAOs, they are better adapted to onchain companies.